(1)
|
Cash
equivalents exclude cash of $707.1 million included in Cash and Cash
Equivalents of the Condensed Consolidated Balance Sheet as of March 29,
2009.
|
As of
March 29, 2009, the Company did not elect the fair value option under
Statement of Financial Accounting Standards No. 159 (“SFAS 159”),
Establishing the Fair Value
Option for Financial Assets and Liabilities, for any financial assets and
liabilities that were not required to be measured at fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
agency securities
|
|
$ |
29,216 |
|
|
$ |
109 |
|
|
$ |
(3 |
) |
|
$ |
29,322 |
|
|
$ |
40,110 |
|
|
$ |
476 |
|
|
$ |
— |
|
|
$ |
40,586 |
|
U.S.
corporate notes and bonds
|
|
|
40,155 |
|
|
|
278 |
|
|
|
(127 |
) |
|
|
40,306 |
|
|
|
56,916 |
|
|
|
267 |
|
|
|
(360 |
) |
|
|
56,823 |
|
Municipal
notes and bonds
|
|
|
1,130,204
|
|
|
|
24,583
|
|
|
|
(119 |
) |
|
|
1,154,668
|
|
|
|
1,387,592
|
|
|
|
21,714
|
|
|
|
(1,330 |
) |
|
|
1,407,976
|
|
|
|
|
1,199,575 |
|
|
|
24,970 |
|
|
|
(249 |
) |
|
|
1,224,296 |
|
|
|
1,484,618 |
|
|
|
22,457 |
|
|
|
(1,690 |
) |
|
|
1,505,385 |
|
Equity
investments
|
|
|
70,226
|
|
|
|
1,427
|
|
|
|
(24,593 |
) |
|
|
47,060
|
|
|
|
70,226
|
|
|
|
—
|
|
|
|
(32,999 |
) |
|
|
37,227
|
|
Total
available-for-sale investments
|
|
$ |
1,269,801
|
|
|
$ |
26,397
|
|
|
$ |
(24,842 |
) |
|
$ |
1,271,356
|
|
|
$ |
1,554,844
|
|
|
$ |
22,457
|
|
|
$ |
(34,689 |
) |
|
$ |
1,542,612
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Securities
that have been in an unrealized loss position, the fair value and gross
unrealized losses on the available-for-sale investments aggregated by type of
investment instrument, and the length of time that individual securities have
been in a continuous unrealized loss position as of March 29, 2009 are
summarized in the following table (in thousands). Available-for-sale
securities that were in an unrealized gain position have been excluded from the
table and all unrealized losses have been in a continuous unrealized loss
position for less than 12 months.
|
|
Unrealized
Loss for Less than 12 Months
|
|
|
|
|
|
|
|
|
U.S.
agency securities, U.S. corporate and municipal notes and
bonds
|
|
$ |
66,931 |
|
|
$ |
(249 |
) |
Equity
investments
|
|
|
43,571
|
|
|
|
(24,593 |
) |
Total
|
|
$ |
110,502
|
|
|
$ |
(24,842 |
) |
The gross
unrealized loss related to publicly traded equity investments were due to
changes in market prices. The Company has cash flow hedges designated
to substantially mitigate risk from these equity investments as of
March 29, 2009, as discussed in Note 4, “Derivatives and Hedging
Activities.” The gross unrealized loss related to U.S. agency
securities, U.S. corporate and municipal notes and bonds were primarily due to
changes in interest rates. Gross unrealized losses on all
available-for-sale fixed income securities at March 29, 2009 are considered
temporary in nature. Factors considered in determining whether a loss
is temporary include the length of time and extent to which fair value has been
less than the cost basis, the financial condition and near-term prospects of the
investee, and the Company’s intent and ability to hold an investment for a
period of time sufficient to allow for any anticipated recovery in market
value.
Gross
realized gains and losses on sales of available-for-sale securities for the
fiscal quarter ended March 29, 2009 totaled $5.8 million and
($0.6) million, respectively.
Fixed
income securities by contractual maturity as of March 29, 2009 are shown
below (in thousands). Actual maturities may differ from contractual
maturities because issuers of the securities may have the right to prepay
obligations.
|
|
|
|
|
|
|
Due
in one year or less
|
|
$ |
389,092 |
|
|
$ |
392,602 |
|
Due
after one year through five years
|
|
|
810,483
|
|
|
|
831,694
|
|
Total
|
|
$ |
1,199,575
|
|
|
$ |
1,224,296
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
4.
|
Derivatives
and Hedging Activities
|
The
Company uses derivative instruments primarily to manage exposures to foreign
currency and equity security price risks. The Company’s primary
objective in holding derivatives is to reduce the volatility of earnings and
cash flows associated with changes in foreign currency and equity security
prices. The program is not designated for trading or speculative
purposes. The Company’s derivatives expose the Company to credit risk
to the extent that the counterparties may be unable to meet the terms of the
agreement. The Company seeks to mitigate such risk by limiting its
counterparties to major financial institutions and by spreading the risk across
several major financial institutions. In addition, the potential risk
of loss with any one counterparty resulting from this type of credit risk is
monitored on an ongoing basis.
In
accordance with Statement of Financial Accounting Standards No. 133
(“SFAS 133”), Accounting
for Derivative Instruments and Hedging Activities, and Statement of
Accounting Standards No. 161 (“SFAS 161”), Disclosures about Derivative
Instruments and Hedging Activities, the Company recognizes derivative
instruments as either assets or liabilities on the balance sheet at fair value
and provides qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of and gains and
losses on derivative instruments, and disclosures about credit-risk-related
contingent features in derivative agreements. Changes in fair value
(i.e., gains or losses)
of the derivatives are recorded as Cost of Product Revenues or Other Income
(Expense), or as accumulated Other Comprehensive Income (“OCI”).
Cash Flow
Hedges. The Company uses a combination of forward contracts
and options designated as cash flow hedges to hedge a portion of future
forecasted purchases in Japanese yen. The gain or loss on the
effective portion of a cash flow hedge is initially reported as a component of
accumulated OCI and subsequently reclassified into Cost of Product Revenues in
the same period or periods in which the cost of product revenues is recognized,
or reclassified into Other Income (Expense) if the hedged transaction becomes
probable of not occurring. Any gain or loss after a hedge is
de-designated because it is no longer probable of occurring or related to an
ineffective portion of a hedge, as well as any amount excluded from the
Company’s hedge effectiveness, is recognized as other income (expense)
immediately, and was a net loss of $1.0 million for the three months
ended March 29, 2009. As of March 29, 2009, the Company had
forward contracts and options in place that hedged future purchases of
approximately 16.5 billion Japanese yen, or approximately
$169 million, based upon the exchange rate as of March 29, 2009, and
the net unrealized gain on the effective portion of these cash flow hedges was
$12.2 million. The forward and option contracts cover future
Japanese yen purchases expected to occur over the next twelve
months.
The
Company has an outstanding cash flow hedge designated to mitigate equity risk
associated with certain available-for-sale investments in equity
securities. The gain or loss on the cash flow hedge is reported as a
component of accumulated OCI and will be reclassified into Other Income
(Expense) in the same period that the equity securities are sold. The
securities had a fair value of $43.6 million and $35.2 million as of
March 29, 2009 and December 28, 2008, respectively. The
cash flow hedge designated to mitigate equity risk of these securities had a
fair value of $22.2 million and $32.0 million as of March 29,
2009 and December 28, 2008, respectively.
Other
Derivatives. Other derivatives not designated as hedging
instruments under SFAS 133 consist primarily of forward contracts to
minimize the risk associated with the foreign exchange effects of revaluing
monetary assets and liabilities. Monetary assets and liabilities
denominated in foreign currencies and the associated outstanding forward
contracts were marked-to-market at March 29, 2009 with realized and
unrealized gains and losses included in Other Income (Expense). As of
March 29, 2009, the Company had foreign currency forward contracts in place
hedging exposures in European euros, Israeli new shekels, Japanese yen and
Taiwanese dollars. Foreign currency forward contracts were
outstanding to buy and (sell) U.S. dollar equivalent of approximately
$262 million and ($1.6) billion in foreign currencies, respectively,
based upon the exchange rates at March 29, 2009.
For the
three months ended March 29, 2009, non-designated foreign currency forward
contracts resulted in a gain of $100.1 million including forward-point
income. For the three months ended March 29, 2009, the
revaluation of the foreign currency exposures hedged by these forward contracts
resulted in a loss of $100.2 million. All of the above noted
gains and losses are included in Interest (Expense) and Other Income (Expense),
net, in the Company’s Condensed Consolidated Statements of
Operations.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
The
amounts in the tables below include fair value adjustments related to the
Company’s own credit risk and counterparty credit risk.
Fair Value of
Derivative Contracts. Fair value of derivative contracts under
SFAS 133 were as follows (in thousands):
|
|
Derivative
Assets Reported in
|
|
|
Derivative Liabilities Reported
in
|
|
|
|
|
|
|
|
|
|
Other
Current Accrued Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts designated as cash flow hedges
|
|
$ |
12,922 |
|
|
$ |
51,576 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
757 |
|
|
$ |
— |
|
Equity
market risk contract designated as cash flow hedge
|
|
|
— |
|
|
|
— |
|
|
|
22,161 |
|
|
|
31,987 |
|
|
|
— |
|
|
|
— |
|
Total
derivatives designated as hedging instruments
|
|
|
12,922 |
|
|
|
51,576 |
|
|
|
22,161 |
|
|
|
31,987 |
|
|
|
757 |
|
|
|
— |
|
|
|
|
33,620
|
|
|
|
21,570
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,535
|
|
|
|
153,523
|
|
Total
derivatives
|
|
$ |
46,542 |
|
|
$ |
73,146 |
|
|
$ |
22,161 |
|
|
$ |
31,987 |
|
|
$ |
8,292 |
|
|
$ |
153,523 |
|
Foreign Exchange
Contracts Designated as Cash Flow Hedges. The effective
portion of designated cash flow derivative contracts under SFAS 133 on the
results of operations were as follows (in thousands):
|
|
|
|
|
|
Amount
of Loss Recognized in OCI
|
|
|
Amount
of Gain Reclassified from OCI to the Statement of
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts designated as cash flow hedges
|
|
$ |
(14,638 |
) |
|
$ |
— |
|
|
$ |
3,610 |
|
|
$ |
— |
|
Equity
market risk contract designated as cash flow hedge
|
|
|
(9,826 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Foreign
exchange contracts designated as cash flow hedges relate primarily to wafer
purchases and the associated gains (losses) are expected to be recorded in Cost
of Product Revenues when reclassified out of accumulated OCI. Gains
(losses) from the equity market risk contract are expected to be recorded in
Other Income (Expense) when reclassified out of accumulated OCI.
The
Company expects to realize the accumulated OCI balance related to foreign
exchange contracts within the next twelve months and realize the accumulated OCI
balance related to the equity market risk contract in fiscal year
2011.
The
ineffective portion and amount excluded from effectiveness testing on designated
cash flow derivative contracts under SFAS 133 on the Company’s results of
operations recognized in Other Income (Expense) were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts designated as cash flow hedges
|
|
$ |
(997 |
) |
|
$ |
— |
|
Equity
market risk contract designated as cash flow hedge
|
|
|
— |
|
|
|
— |
|
Effect of
Non-Designated Derivative Contracts on the Condensed Consolidated Statements of
Operations. The effect of non-designated derivative contracts
on the Company’s results of operations recognized in Other Income (Expense) was
as follows (in thousands):
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
5.
|
Balance
Sheet Information
|
Accounts
Receivable from Product Revenues, net. Accounts receivable from product
revenues, net, were as follows (in thousands):
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
$ |
413,549 |
|
|
$ |
584,262 |
|
Allowance
for doubtful accounts
|
|
|
(16,068 |
) |
|
|
(13,881 |
) |
Price
protection, promotions and other activities
|
|
|
(288,386 |
) |
|
|
(448,289 |
) |
Total
accounts receivable from product revenues, net
|
|
$ |
109,095 |
|
|
$ |
122,092 |
|
Inventory. Inventories,
net of reserves, were as follows (in thousands):
|
|
|
|
|
|
|
Raw
material
|
|
$ |
264,330 |
|
|
$ |
309,436 |
|
Work-in-process
|
|
|
137,217 |
|
|
|
90,544 |
|
Finished
goods
|
|
|
150,623 |
|
|
|
198,271 |
|
Total
inventory
|
|
$ |
552,170 |
|
|
$ |
598,251 |
|
Other Current
Assets. Other current assets were as follows
(in thousands):
|
|
|
|
|
|
|
Royalty
and other receivables
|
|
$ |
34,119 |
|
|
$ |
81,451 |
|
Prepaid
expenses
|
|
|
16,828 |
|
|
|
20,321 |
|
Prepaid
income taxes and tax related receivables
|
|
|
126,401 |
|
|
|
294,906 |
|
Other
current assets
|
|
|
46,723 |
|
|
|
73,283 |
|
Total
other current assets
|
|
$ |
224,071 |
|
|
$ |
469,961 |
|
Notes Receivable
and Investments in the Flash Ventures with Toshiba. Notes
receivable and investments in the flash ventures with Toshiba Corporation
(“Toshiba”) were as follows (in thousands):
|
|
|
|
|
|
|
Notes
receivable, Flash Partners Ltd.
|
|
$ |
634,913 |
|
|
$ |
843,380 |
|
Notes
receivable, Flash Alliance Ltd.
|
|
|
441,011 |
|
|
|
276,518 |
|
Investment
in FlashVision Ltd.
|
|
|
— |
|
|
|
63,965 |
|
Investment
in Flash Partners Ltd.
|
|
|
189,357 |
|
|
|
202,530 |
|
Investment
in Flash Alliance Ltd.
|
|
|
202,331 |
|
|
|
215,898 |
|
Total
notes receivable and investments in the flash ventures with
Toshiba
|
|
$ |
1,467,612 |
|
|
$ |
1,602,291 |
|
In the
first quarter of fiscal year 2009, the Company completed the wind-down of
FlashVision Ltd. (“FlashVision”) and received cash distributions of
$12.7 million, released $34.0 million of cumulative translation
adjustments recorded in accumulated OCI and recorded an impairment charge of
$7.9 million in Other Income (Expense) related to FlashVision.
See
Note 12, “Commitments, Contingencies and Guarantees – FlashVision, Flash
Partners and Flash Alliance,” regarding equity method investments in the three
months ended March 29, 2009 and Note 13, “Related Parties,” for the
Company’s maximum loss exposure related to these variable interest
entities.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Other Current
Accrued Liabilities. Other current accrued liabilities were as
follows (in thousands):
|
|
|
|
|
|
|
Accrued
payroll and related expenses
|
|
$ |
54,253 |
|
|
$ |
54,516 |
|
Accrued
restructuring
|
|
|
17,198 |
|
|
|
22,545 |
|
Research
and development liability, related party
|
|
|
2,000 |
|
|
|
4,000 |
|
Foreign
currency forward contract payables
|
|
|
8,292 |
|
|
|
153,523 |
|
Flash
Ventures adverse purchase commitments for under utilized
capacity
(see
Note 12)
|
|
|
62,778 |
|
|
|
121,486 |
|
Other
accrued liabilities
|
|
|
163,005 |
|
|
|
146,373 |
|
Total
other current accrued liabilities
|
|
$ |
307,526 |
|
|
$ |
502,443 |
|
Non-current
liabilities. Non-current liabilities were as follows (in
thousands):
|
|
|
|
|
|
|
Deferred
tax liability
|
|
$ |
16,723 |
|
|
$ |
87,688 |
|
Income
taxes payable
|
|
|
154,264 |
|
|
|
145,432 |
|
Accrued
restructuring
|
|
|
10,578 |
|
|
|
11,070 |
|
Other
non-current liabilities
|
|
|
27,916 |
|
|
|
30,126 |
|
Total
non-current liabilities
|
|
$ |
209,481 |
|
|
$ |
274,316 |
|
As of
March 29, 2009 and December 28, 2008, the total current accrued
restructuring liability was primarily comprised of contract termination costs
related to the 2008 Restructuring Plans and the current portion of excess lease
obligations. See Note 9, “Restructuring Plans.” The
non-current accrued restructuring balance and activity from the prior year end
was primarily related to excess lease obligations and cash lease obligation
payments, respectively. The lease obligations extend through the end
of the lease term in fiscal year 2016.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Intangible
asset balances are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
technology
|
|
$ |
79,800 |
|
|
$ |
(35,924 |
) |
|
$ |
43,876 |
|
Developed
product technology
|
|
|
11,400
|
|
|
|
(5,225 |
) |
|
|
6,175
|
|
Acquisition-related
intangible assets
|
|
|
91,200 |
|
|
|
(41,149 |
) |
|
|
50,051 |
|
Technology
licenses and patents
|
|
|
16,526 |
|
|
|
(7,856 |
) |
|
|
8,670 |
|
Total
|
|
$ |
107,726 |
|
|
$ |
(49,005 |
) |
|
$ |
58,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
technology
|
|
$ |
315,301 |
|
|
$ |
(136,001 |
) |
|
$ |
(132,407 |
) |
|
$ |
46,893 |
|
Developed
product technology
|
|
|
12,900 |
|
|
|
— |
|
|
|
(6,318 |
) |
|
|
6,582 |
|
Customer
relationships
|
|
|
80,100 |
|
|
|
(39,784 |
) |
|
|
(40,316 |
) |
|
|
— |
|
Acquisition-related
intangible assets
|
|
|
408,301 |
|
|
|
(175,785 |
) |
|
|
(179,041 |
) |
|
|
53,475 |
|
Technology
licenses and patents
|
|
|
23,814 |
|
|
|
— |
|
|
|
(14,107 |
) |
|
|
9,707 |
|
Total
|
|
$ |
432,115 |
|
|
$ |
(175,785 |
) |
|
$ |
(193,148 |
) |
|
$ |
63,182 |
|
The
annual expected amortization expense of intangible assets that existed as of
March 29, 2009, is presented below (in thousands):
|
|
Estimated
Amortization Expenses
|
|
Fiscal year:
|
|
Acquisition-Related
Intangible Assets
|
|
|
Technology
Licenses and Patents
|
|
2009
(remaining nine months)
|
|
$ |
10,271 |
|
|
$ |
3,414 |
|
2010
|
|
|
13,695 |
|
|
|
3,121 |
|
2011
|
|
|
13,034 |
|
|
|
1,268 |
|
2012
|
|
|
12,529 |
|
|
|
620 |
|
2013
|
|
|
522 |
|
|
|
245 |
|
2014
and thereafter
|
|
|
— |
|
|
|
2 |
|
Total
|
|
$ |
50,051 |
|
|
$ |
8,670 |
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Liability
for warranty expense is included in Other Current Accrued Liabilities and
Non-current Liabilities in the accompanying Condensed Consolidated Balance
Sheets and the activity was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
$ |
36,469 |
|
|
$ |
18,662 |
|
Additions
|
|
|
4,913 |
|
|
|
11,155 |
|
Usage
|
|
|
(10,088 |
) |
|
|
(16,124 |
) |
Balance,
end of period
|
|
$ |
31,294 |
|
|
$ |
13,693 |
|
The
majority of the Company’s products have a warranty ranging from one to five
years. A provision for the estimated future cost related to warranty
expense is recorded at the time of customer invoice. The Company’s
warranty liability is affected by customer and consumer returns, product
failures, number of units sold, and repair or replacement costs
incurred. Should actual product failure rates, or repair or
replacement costs differ from the Company’s estimates, increases or decreases to
its warranty liability would be required. Prior year’s additions to
and usage of warranty reserve has been adjusted to conform to the current
presentation format.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
8.
|
Accumulated
Other Comprehensive Income
|
Accumulated
other comprehensive income, net of tax, presented in the accompanying Condensed
Consolidated Balance Sheets consists of the accumulated unrealized gains and
losses on available-for-sale investments, including the Company’s investments in
equity securities, as well as currency translation adjustments relating to local
currency denominated subsidiaries and equity investees, and the accumulated
unrealized gains and losses related to derivative instruments accounted for
under hedge accounting (in thousands).
|
|
|
|
|
|
|
Accumulated
net unrealized gain (loss) on:
|
|
|
|
|
|
|
Available-for-sale
investments
|
|
$ |
(7,222 |
) |
|
$ |
(18,408 |
) |
Foreign
currency translation
|
|
|
42,883 |
|
|
|
101,186 |
|
Hedging
activities
|
|
|
78,125 |
|
|
|
106,199 |
|
Total
accumulated other comprehensive income
|
|
$ |
113,786 |
|
|
$ |
188,977 |
|
Comprehensive
income (loss) is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(207,995 |
) |
|
$ |
10,960 |
|
Non-controlling
interest
|
|
|
(494 |
) |
|
|
— |
|
|
|
|
(208,489 |
) |
|
|
10,960 |
|
Change
in accumulated unrealized gain (loss) on:
|
|
|
|
|
|
|
|
|
Available-for-sale
investments
|
|
|
11,186 |
|
|
|
7,793 |
|
Foreign
currency translation
|
|
|
(58,303 |
) |
|
|
38,557 |
|
Hedging
activities
|
|
|
(28,074 |
) |
|
|
(1,636 |
) |
Comprehensive
income (loss)
|
|
$ |
(283,680 |
) |
|
$ |
55,674 |
|
Non-controlling
interest is included in Other Income (Expense) on the Condensed Consolidated
Statements of Operations.
The
amount of income tax expense allocated to accumulated unrealized gain (loss) on
available-for-sale investments and hedging activities was $8.2 million and
$7.1 million at March 29, 2009 and December 28, 2008,
respectively.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
In the
three months ended March 29, 2009, the Company recorded restructuring expense of
$0.8 million, net, related to employee severance costs in Restructuring and
Other in the Condensed Consolidated Statements of Operations.
Second Quarter of
Fiscal 2008 Restructuring Plan. In the second quarter ended
June 28, 2008, the Company initiated restructuring actions in an effort to
better align its cost structure with its anticipated revenue stream and to
improve the Company’s results of operations and cash flows (“Second Quarter of
Fiscal 2008 Restructuring Plan”). The following table sets forth the
activity in the accrued restructuring balances related to the Second Quarter of
Fiscal 2008 Restructuring Plan (in millions):
|
|
|
|
Restructuring
provision
|
|
$ |
4.1 |
|
Cash
paid
|
|
|
(3.1 |
) |
|
|
|
1.0 |
|
Accrual
adjustments
|
|
|
(0.8 |
) |
|
|
$ |
0.2
|
|
The
remaining restructuring accrual balance is reflected in Other Current Accrued
Liabilities in the Condensed Consolidated Balance Sheets and is expected to be
utilized in fiscal year 2009.
Fourth Quarter of
Fiscal 2008 Restructuring Plan and Other. In the fourth
quarter ended December 28, 2008, the Company initiated additional
restructuring actions in an effort to better align its cost structure with
business operation levels (“Fourth Quarter of Fiscal 2008 Restructuring Plan and
Other”). Under this plan, the Company involuntarily terminated an
additional 51 employees in the first quarter of fiscal year 2009, in all
functions, primarily in the U.S. and Israel. The following table sets
forth the activity in the accrued restructuring balances related to the Fourth
Quarter of Fiscal 2008 Restructuring Plan and Other
(in millions):
|
|
|
|
|
Contract
Termination Fees and Other Charges
|
|
|
|
|
Restructuring
and other provisions
|
|
$ |
10.4 |
|
|
$ |
21.0 |
|
|
$ |
31.4 |
|
Cash
paid
|
|
|
(4.1 |
) |
|
|
(2.4 |
) |
|
|
(6.5 |
) |
Non-cash
utilization
|
|
|
|
|
|
(4.6 |
) |
|
|
(4.6 |
) |
|
|
|
6.3 |
|
|
|
14.0 |
|
|
|
20.3 |
|
Restructuring
|
|
|
1.6 |
|
|
─
|
|
|
|
1.6 |
|
Cash
paid
|
|
|
(6.2 |
) |
|
|
(1.5 |
) |
|
|
(7.7 |
) |
|
|
$ |
1.7
|
|
|
$ |
12.5
|
|
|
$ |
14.2
|
|
The
Company anticipates that the remaining restructuring accrual balance of
$14.2 million will be substantially paid out or utilized in fiscal year
2009. The remaining restructuring accrual balance is reflected in
Other Current Accrued Liabilities in the Condensed Consolidated Balance
Sheets.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
10.
|
Share-Based
Compensation
|
Share-Based
Plans. The
Company has a share-based compensation program that provides its Board of
Directors with broad discretion in creating equity incentives for employees,
officers, non-employee board members and non-employee service
providers. This program includes incentive and non-statutory stock
option awards, stock appreciation right awards, restricted stock awards,
performance-based cash bonus awards for Section 16 executive officers and an
automatic grant program for non-employee board members pursuant to which such
individuals will receive option grants or other stock awards at designated
intervals over their period of board service. These awards are
granted under various plans, all of which are stockholder
approved. Stock option awards generally vest as follows: 25% of the
shares vest on the first anniversary of the vesting commencement date and the
remaining 75% vest proportionately each quarter over the next 3 years of
continued service. Restricted stock awards generally vest in equal
annual installments over a 2 or 4-year period. Initial grants under
the automatic grant program vest over a 4-year period and subsequent grants vest
over a 1-year period in accordance with the specific vesting provisions set
forth in that program. Additionally, the Company has an Employee
Stock Purchase Plan (“ESPP”) that allows employees to purchase shares of common
stock at 85% of the fair market value at the subscription date or the date of
purchase, whichever is lower.
Valuation
Assumptions. The fair value of the
Company’s stock options granted to employees, officers and non-employee board
members and ESPP shares granted to employees for the three months ended
March 29, 2009 and March 30, 2008 was estimated using the following
weighted average assumptions:
|
|
|
|
|
Option
Plan Shares
|
|
|
Dividend
yield
|
None
|
None
|
Expected
volatility
|
0.87
|
0.50
|
Risk
free interest rate
|
1.39%
|
2.28%
|
Expected
lives
|
3.6
years
|
3.6
years
|
Estimated
annual forfeiture rate
|
9.07%
|
8.31%
|
Weighted
average fair value at grant date
|
$4.92
|
$9.76
|
|
|
|
Employee
Stock Purchase Plan Shares
|
|
|
Dividend
yield
|
None
|
None
|
Expected
volatility
|
0.81
|
0.53
|
Risk
free interest rate
|
0.39%
|
2.15%
|
Expected
lives
|
½
year
|
½
year
|
Weighted
average fair value for grant period
|
$4.21
|
$8.34
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Share-Based
Compensation Plan Activities
Stock Options and
SARs. A summary of stock option and stock appreciation right
(“SARs”) activity under all of the Company’s share-based compensation plans as
of March 29, 2009 and changes during the three months ended March 29,
2009 is presented below (in thousands, except exercise price and contractual
term):
|
|
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
25,057 |
|
|
$ |
33.59 |
|
|
|
4.9 |
|
|
$ |
5,284 |
|
Granted
|
|
|
3,727 |
|
|
|
8.21 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(129 |
) |
|
|
7.71 |
|
|
|
|
|
|
|
419 |
|
Forfeited
|
|
|
(606 |
) |
|
|
40.61 |
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(409 |
) |
|
|
38.48 |
|
|
|
|
|
|
|
|
|
|
|
|
27,640 |
|
|
|
30.06 |
|
|
|
4.9 |
|
|
|
35,320 |
|
Options
and SARs vested and expected to vest after March 29, 2009, net of
forfeitures
|
|
|
26,002 |
|
|
|
30.54 |
|
|
|
4.8
|
|
|
|
31,898 |
|
|
|
|
17,230 |
|
|
|
32.29 |
|
|
|
4.2
|
|
|
|
16,947 |
|
At
March 29, 2009, the total compensation cost related to options and SARs
granted to employees under the Company’s share-based compensation plans but not
yet recognized was approximately $112.1 million, net of estimated
forfeitures. This cost will be amortized on a straight-line basis
over a weighted average period of approximately 2.9 years.
Restricted Stock
Units. Restricted stock units (“RSUs”) are converted into
shares of the Company’s common stock upon vesting on a one-for-one
basis. Typically, vesting of RSUs is subject to the employee’s
continuing service to the Company. The cost of these awards is
determined using the fair value of the Company’s common stock on the date of the
grant, and compensation is recognized on a straight-line basis over the
requisite vesting period.
A summary
of the changes in RSUs outstanding under the Company’s share-based compensation
plan during the three months ended March 29, 2009 is presented below
(in thousands, except for weighted average grant date fair
value):
|
|
|
|
|
Weighted
Average Grant Date Fair Value
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
1,523 |
|
|
$ |
25.38 |
|
|
$ |
13,983 |
|
Granted
|
|
|
|
|
|
|
— |
|
|
|
|
|
Vested
|
|
|
(214 |
) |
|
|
41.62 |
|
|
|
2,166 |
|
Forfeited
|
|
|
(96 |
) |
|
|
22.33 |
|
|
|
|
|
|
|
|
1,213 |
|
|
|
22.75 |
|
|
|
15,868 |
|
As of
March 29, 2009, the Company had $21.6 million of unrecognized
compensation expense, net of estimated forfeitures, related to RSUs, which will
be recognized over a weighted average estimated remaining life of
1.7 years.
Employee Stock
Purchase Plan. At March 29, 2009, there was
$2.2 million of total unrecognized compensation cost related to ESPP that
is expected to be recognized over a period of approximately
4 months.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Share-Based
Compensation Expense. The Company recorded $16.3 million
and $23.2 million of share-based compensation expense for the three months
ended March 29, 2009 and March 30, 2008, respectively, that included
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation expense by caption:
|
|
|
|
|
|
|
Cost
of product revenues
|
|
$ |
2,374 |
|
|
$ |
3,629 |
|
Research
and development
|
|
|
6,152 |
|
|
|
8,826 |
|
Sales
and marketing
|
|
|
2,349 |
|
|
|
3,511 |
|
General
and administrative
|
|
|
5,455 |
|
|
|
7,260 |
|
Total
share-based compensation expense
|
|
$ |
16,330 |
|
|
$ |
23,226 |
|
|
|
|
|
|
|
|
|
|
Share-based
compensation expense by type of award:
|
|
|
|
|
|
|
|
|
Stock
options and SARs
|
|
$ |
13,881 |
|
|
$ |
20,634 |
|
RSUs
|
|
|
2,860 |
|
|
|
1,487 |
|
ESPP
|
|
|
(411 |
) |
|
|
1,105 |
|
Total
share-based compensation expense
|
|
$ |
16,330 |
|
|
$ |
23,226 |
|
Share-based
compensation expense of $2.4 million and $3.0 million related to
manufacturing personnel was capitalized into inventory as of March 29, 2009
and March 30, 2008, respectively.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
11.
|
Net
Income (Loss) Per Share
|
The
following table sets forth the computation of basic and diluted net income
(loss) per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for basic net income (loss) per share:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(207,995 |
) |
|
$ |
10,960 |
|
Denominator
for basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
226,529 |
|
|
|
224,518 |
|
Basic
net income (loss) per share
|
|
$ |
(0.92 |
) |
|
$ |
0.05 |
|
Numerator
for diluted net income (loss) per share:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(207,995 |
) |
|
$ |
10,960 |
|
Interest
on the 1% Notes due 2035, net of tax
|
|
|
— |
|
|
|
117 |
|
Net
income (loss) for diluted net income (loss) per share
|
|
$ |
(207,995 |
) |
|
$ |
11,077 |
|
Denominator
for diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
226,529 |
|
|
|
224,518 |
|
Incremental
common shares attributable to exercise of outstanding employee stock
options, restricted stock, restricted stock units and warrants (assuming
proceeds would be used to purchase common stock)
|
|
|
— |
|
|
|
2,950 |
|
Effect
of dilutive 1% Notes due 2035
|
|
|
— |
|
|
|
2,012 |
|
Shares
used in computing diluted net income (loss) per share
|
|
|
226,529 |
|
|
|
229,480 |
|
Diluted
net income (loss) per share
|
|
$ |
(0.92 |
) |
|
$ |
0.05 |
|
Anti-dilutive
shares excluded from net income (loss) per share
calculation
|
|
|
54,042 |
|
|
|
47,631 |
|
Basic
earnings per share exclude any dilutive effects of stock options, SARs, RSUs,
warrants and convertible securities. For the three months ended
March 30, 2008, diluted earnings per share include the dilutive effects of
stock options, SARs, RSUs, warrants and the 1% Notes due
2035. Certain common stock issuable under stock options, SARs,
warrants and the 1% Notes due 2013 were anti-dilutive for the three months ended
March 29, 2009 and March 30, 2008.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
12.
|
Commitments,
Contingencies and Guarantees
|
FlashVision. In
June 2008, the Company agreed to wind-down its 49.9% ownership interest in
FlashVision Ltd. (“FlashVision”), a business venture with Toshiba which owns
50.1%. In this venture, the Company and Toshiba collaborated in the
development and manufacture of 200-millimeter NAND flash memory
products. In fiscal year 2008, the Company and Toshiba ceased
production of NAND flash memory products utilizing 200-millimeter
wafers. At March 29, 2009, the Company’s investment in this venture
has been written-down to zero.
Flash
Partners. The Company has a 49.9% ownership interest in Flash
Partners Ltd. (“Flash Partners”), a business venture with Toshiba which owns
50.1%, formed in fiscal year 2004. In the venture, the Company and
Toshiba have collaborated in the development and manufacture of NAND flash
memory products. These NAND flash memory products are manufactured by
Toshiba at the 300-millimeter wafer fabrication facility located in Yokkaichi,
Japan, using the semiconductor manufacturing equipment owned or leased by Flash
Partners. Flash Partners purchases wafers from Toshiba at cost and
then resells those wafers to the Company and Toshiba at cost plus a
markup. The Company accounts for its 49.9% ownership position in
Flash Partners under the equity method of accounting. The Company is
committed to purchase its provided three-month forecast of Flash Partner’s NAND
wafer supply, which generally equals 50% of the venture’s output. The
Company is not able to estimate its total wafer purchase commitment obligation
beyond its rolling three-month purchase commitment because the price is
determined by reference to the future cost of producing the semiconductor
wafers. In addition, the Company is committed to fund 49.9% of Flash
Partners’ costs to the extent that Flash Partners’ revenues from wafer sales to
the Company and Toshiba are insufficient to cover these costs.
As of
March 29, 2009, the Company had notes receivable from Flash Partners of
62.1 billion Japanese yen, or approximately $635 million, based upon
the exchange rate of 97.73 Japanese yen to one U.S. dollar at March 29,
2009. These notes are secured by the equipment purchased by Flash
Partners using the note proceeds. The Company has additional
guarantee obligations to Flash Partners, see “Off-Balance Sheet
Liabilities.” At March 29, 2009, the Company had an equity
investment in Flash Partners of $189.4 million denominated in Japanese yen,
offset by $15.1 million of cumulative translation gains recorded in
accumulated OCI. In the first quarter of fiscal year 2009, the
Company recorded a $1.4 million basis adjustment to its equity in earnings
from Flash Partners related to the difference between the basis in the Company’s
equity investment compared to the historical basis of the assets recorded by
Flash Partners.
Flash
Alliance. The Company has a 49.9% ownership interest in Flash
Alliance Ltd. (“Flash Alliance”), a business venture with Toshiba which owns
50.1%, formed in fiscal year 2006. In the venture, the Company and
Toshiba have collaborated in the development and manufacture of NAND flash
memory products. These NAND flash memory products are manufactured by
Toshiba at its 300-millimeter wafer fabrication facility located in Yokkaichi,
Japan, using the semiconductor manufacturing equipment owned or leased by Flash
Alliance. Flash Alliance purchases wafers from Toshiba at cost and
then resells those wafers to the Company and Toshiba at cost plus a
markup. The Company accounts for its 49.9% ownership position in
Flash Alliance under the equity method of accounting. The Company is
committed to purchase its provided three-month forecast of Flash Alliance’s NAND
wafer supply, which generally equals 50% of the venture’s output. The
Company is not able to estimate its total wafer purchase commitment obligation
beyond its rolling three-month purchase commitment because the price is
determined by reference to the future cost of producing the semiconductor
wafers. In addition, the Company is committed to fund 49.9% of Flash
Alliance’s costs to the extent that Flash Alliance’s revenues from wafer sales
to the Company and Toshiba are insufficient to cover these costs.
As of
March 29, 2009, the Company had notes receivable from Flash Alliance of
43.1 billion Japanese yen, or approximately $441 million, based upon
the exchange rate at March 29, 2009. These notes are secured by
the equipment purchased by Flash Alliance using the note
proceeds. The Company has additional guarantee obligations to Flash
Alliance, see “Off-Balance Sheet Liabilities.” At March 29,
2009, the Company had an equity investment in Flash Alliance of
$202.3 million denominated in Japanese yen, offset by $16.2 million of
cumulative translation adjustments recorded in accumulated OCI. In
the first quarter of fiscal year 2009, the Company recorded a $3.7 million
basis adjustment to its equity earnings from Flash Alliance related to the
difference between the basis in the Company’s equity investment compared to the
historical basis of the assets recorded by Flash Alliance.
The
Company and Toshiba have restructured the Flash Ventures by selling more than
20% of the Flash Ventures’ capacity to Toshiba. The restructuring
resulted in the Company receiving value of 79.3 billion Japanese yen of
which 26.1 billion Japanese yen, or $277.1 million, was received in
cash, reducing outstanding notes receivable from Flash Ventures and
53.2 billion Japanese yen reflected the transfer of off-balance sheet
equipment lease guarantee obligations from the Company to
Toshiba. The restructuring was completed in a series of closings
through March 31, 2009. The Company received the cash and
transferred 51.8 billion Japanese yen of off-balance sheet equipment lease
guarantee obligations in the first quarter of fiscal year 2009, and the
remainder of the lease guarantee obligations were transferred on March 31,
2009. Transaction costs of $10.9 million related to the sale and
transfer of equipment and lease obligations were expensed in the first quarter
of fiscal year 2009.
The
Company has guarantee obligations to Flash Ventures, see “Off-Balance Sheet
Liabilities.”
Toshiba
Foundry. The
Company has the ability to purchase additional capacity under a foundry
arrangement with Toshiba.
Business Ventures
and Foundry Arrangement with Toshiba. Purchase orders placed
under Flash Ventures and the foundry arrangement with Toshiba for up to three
months are binding and cannot be canceled.
Other Silicon
Sources. The Company’s contracts with its other sources of
silicon wafers generally require the Company to provide purchase order
commitments based on nine month rolling forecasts. The purchase
orders placed under these arrangements relating to the first three months of the
nine month forecast are generally binding and cannot be
canceled. These outstanding purchase commitments for other sources of
silicon wafers are included as part of the total “Noncancelable production
purchase commitments” in the “Contractual Obligations” table below.
Subcontractors. In
the normal course of business, the Company’s subcontractors periodically procure
production materials based on the forecast the Company provides to
them. The Company’s agreements with these subcontractors require that
the Company reimburse them for materials that are purchased on the Company’s
behalf in accordance with such forecast. Accordingly, the Company may
be committed to certain costs over and above its open noncancelable purchase
orders with these subcontractors. These commitments for production
materials to subcontractors are included as part of the total “Noncancelable
production purchase commitments” in the “Contractual Obligations” table
below.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Off-Balance
Sheet Liabilities
The
following table details the Company’s portion of the remaining guarantee
obligations under each of Flash Ventures’ master lease facilities in both
Japanese yen and the U.S. dollar equivalent based upon the exchange rate at
March 29, 2009.
Master Lease Agreements by Execution
Date
|
|
|
|
|
|
|
(Yen
in billions)
|
|
|
(Dollars
in thousands)
|
|
|
Flash
Partners
|
|
|
|
|
|
|
|
December 2004
|
|
¥ |
8.0 |
|
|
$ |
82,084 |
|
2010
|
December 2005
|
|
|
4.8 |
|
|
|
48,869 |
|
2011
|
June
2006
|
|
|
9.4 |
|
|
|
96,486 |
|
2011
|
September 2006
|
|
|
23.7 |
|
|
|
243,066 |
|
2011
|
March
2007
|
|
|
11.7 |
|
|
|
119,291 |
|
2012
|
February
2008
|
|
|
4.8 |
|
|
|
49,027 |
|
2013
|
|
|
|
62.4 |
|
|
|
638,823 |
|
|
Flash
Alliance
|
|
|
|
|
|
|
|
|
|
November
2007
|
|
|
24.6 |
|
|
|
251,208 |
|
2013
|
June
2008
|
|
|
33.3 |
|
|
|
341,090 |
|
2013
|
|
|
|
57.9 |
|
|
|
592,298 |
|
|
Total
guarantee obligations
|
|
¥ |
120.3 |
|
|
$ |
1,231,121 |
|
|
The
following table details the breakdown of the Company’s remaining guarantee
obligations between the principal amortization and the purchase option exercise
price at the term of the master lease agreements, in annual installments as of
March 29, 2009 in U.S. dollars based upon the exchange rate at
March 29, 2009.
Annual Installments
|
|
Payment
of Principal Amortization
|
|
|
Purchase
Option Exercise Price at Final Lease Terms
|
|
|
|
|
|
|
(In thousands)
|
|
Year
1
|
|
$ |
312,886 |
|
|
$ |
─
|
|
|
$ |
312,886 |
|
Year
2
|
|
|
259,322 |
|
|
|
67,432 |
|
|
|
326,754 |
|
Year
3
|
|
|
163,642 |
|
|
|
160,171 |
|
|
|
323,813 |
|
Year
4
|
|
|
75,447 |
|
|
|
98,781 |
|
|
|
174,228 |
|
Year
5
|
|
|
13,807 |
|
|
|
79,633 |
|
|
|
93,440 |
|
Total
guarantee obligations
|
|
$ |
825,104 |
|
|
$ |
406,017 |
|
|
$ |
1,231,121 |
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Flash
Partners. Flash Partners sells and leases back from a
consortium of financial institutions (“lessors”) a portion of its tools and has
entered into six equipment master lease agreements totaling 300.0 billion
Japanese yen, or approximately $3.07 billion based upon the exchange rate
at March 29, 2009, of which 124.9 billion Japanese yen, or
approximately $1.28 billion based upon the exchange rate at March 29,
2009, was outstanding at March 29, 2009. The outstanding amount
reflects the reduction in lease amounts of 26.8 billion Japanese yen, or
approximately $275 million based upon the exchange rate at March 29,
2009, due to the restructuring of Flash Partners’ master lease agreements in the
first quarter of fiscal year 2009. For further discussion on the
restructuring of the Flash Partners’ master lease agreements, see “Flash
Ventures” above. The Company and Toshiba have each guaranteed 50%, on
a several basis, of Flash Partners’ obligations under the master lease
agreements. In addition, these master lease agreements are secured by
the underlying equipment. As of March 29, 2009, the amount of
the Company’s guarantee obligation of the Flash Partners’ master lease
agreements, which reflects future payments and any lease adjustments, was
62.4 billion Japanese yen, or approximately $639 million based upon
the exchange rate at March 29, 2009. Certain lease payments are
due quarterly and certain lease payments are due semi-annually, and are
scheduled to be completed in stages through fiscal year 2013. At each
lease payment date, Flash Partners has the option of purchasing the tools from
the lessors. Flash Partners is obligated to insure the equipment,
maintain the equipment in accordance with the manufacturers’ recommendations and
comply with other customary terms to protect the leased assets. The
fair value of the Company’s guarantee obligation of Flash Partners’ master lease
agreements was not material at inception of each master lease.
The
master lease agreements contain customary covenants for Japanese lease
facilities. In addition to containing customary events of default
related to Flash Partners that could result in an acceleration of Flash
Partners’ obligations, the master lease agreements contain an acceleration
clause for certain events of default related to the Company as guarantor,
including, among other things, the Company’s failure to maintain a minimum
shareholders’ equity of at least $1.51 billion, and its failure to maintain
a minimum corporate rating of BB- from Standard & Poors (“S&P”) or
Moody’s Corporation (“Moody’s”), or a minimum corporate rating of BB+ from
Rating & Investment Information, Inc. (“R&I”). As of
March 29, 2009, Flash Partners was in compliance with all of its master
lease covenants. While the Company’s S&P credit rating was B, two
levels below the required minimum corporate rating threshold from S&P, the
Company’s R&I credit rating was BBB-, one level above the required minimum
corporate rating threshold from R&I. If R&I were to downgrade
the Company’s credit rating below the minimum corporate rating threshold, Flash
Partners would become non-compliant under its master equipment lease agreements
and would be required to negotiate a resolution to the non-compliance to avoid
acceleration of the obligations under such agreements. Such
resolution could include, among other things, supplementary security to be
supplied by the Company, as guarantor, or increased interest rates or waiver
fees, should the lessors decide they need additional collateral or financial
consideration under the circumstances. If a non-compliance event were
to occur and if the Company failed to reach a resolution, the Company could be
required to pay a portion or the entire outstanding lease obligations covered by
its guarantee under such Flash Partners master lease
agreements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Flash
Alliance. Flash Alliance sells and leases back from a
consortium of financial institutions (“lessors”) a portion of its tools and has
entered into two equipment master lease agreements totaling 200.0 billion
Japanese yen, or approximately $2.05 billion based upon the exchange rate
at March 29, 2009, of which 115.8 billion Japanese yen, or
approximately $1.18 billion based upon the exchange rate at March 29,
2009, was outstanding as of March 29, 2009. The outstanding
amount reflects the reduction in lease amounts of 25.0 billion Japanese
yen, or approximately $255 million based upon the exchange rate at
March 29, 2009, due to the restructuring of Flash Alliance’s master lease
agreements in the first quarter of fiscal year 2009. For further
discussion on the restructuring of the Flash Alliance’s master lease agreements,
see “Flash Ventures” above. The Company and Toshiba have each
guaranteed 50%, on a several basis, of Flash Alliance’s obligation under the
master lease agreements. In addition, these master lease agreements
are secured by the underlying equipment. As of March 29, 2009,
the amount of the Company’s guarantee obligation of the Flash Alliance’s master
lease agreements was 57.9 billion Japanese yen, or approximately
$592 million based upon the exchange rate at March 29,
2009. Remaining master lease payments are due semi-annually and are
scheduled to be completed in fiscal year 2013. At each lease payment
date, Flash Alliance has the option of purchasing the tools from the
lessors. Flash Alliance is obligated to insure the equipment,
maintain the equipment in accordance with the manufacturers’ recommendations and
comply with other customary terms to protect the leased assets. The
fair value of the Company’s guarantee obligation of Flash Alliance’s master
lease agreements was not material at inception of each master
lease.
The
master lease agreements contain customary covenants for Japanese lease
facilities. In addition to containing customary events of default
related to Flash Alliance that could result in an acceleration of Flash
Alliance’s obligations, the master lease agreements contain an acceleration
clause for certain events of default related to the Company as guarantor,
including, among other things, the Company’s failure to maintain a minimum
shareholders’ equity of at least $1.51 billion, and its failure to maintain
a minimum corporate rating of BB- from S&P or Moody’s or a minimum corporate
rating of BB+ from R&I. As of March 29, 2009, Flash Alliance
was in compliance with all of its master lease covenants. While the
Company’s S&P credit rating was B, two levels below the required minimum
corporate rating threshold from S&P, the Company’s R&I credit rating was
BBB-, one level above the required minimum corporate rating threshold from
R&I. If R&I were to downgrade the Company’s credit rating
below the minimum corporate rating threshold, Flash Alliance would become
non-compliant under its master equipment lease agreements and would be required
to negotiate a resolution to the non-compliance to avoid acceleration of the
obligations under such agreements. Such resolution could include,
among other things, supplementary security to be supplied by the Company, as
guarantor, or increased interest rates or waiver fees, should the lessors decide
they need additional collateral or financial consideration under the
circumstances. If a non-compliance event were to occur and if the
Company failed to reach a resolution, the Company could be required to pay a
portion or the entire outstanding lease obligations covered by its guarantee
under such Flash Alliance master lease agreements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Guarantees
Indemnification
Agreements. The Company has agreed to indemnify suppliers and
customers for alleged patent infringement. The scope of such
indemnity varies, but may, in some instances, include indemnification for
damages and expenses, including attorneys’ fees. The Company may
periodically engage in litigation as a result of these indemnification
obligations. The Company’s insurance policies exclude coverage for
third-party claims for patent infringement. Although the liability is
not remote, the nature of the patent infringement indemnification obligations
prevents the Company from making a reasonable estimate of the maximum potential
amount it could be required to pay to its suppliers and
customers. Historically, the Company has not made any significant
indemnification payments under any such agreements. As of
March 29, 2009, no amounts had been accrued in the accompanying Condensed
Consolidated Financial Statements with respect to these indemnification
guarantees.
As
permitted under Delaware law and the Company’s certificate of incorporation and
bylaws, the Company has agreements, or has assumed agreements in connection with
its acquisitions, whereby it indemnifies certain of its officers, employees, and
each of its directors for certain events or occurrences while the officer,
employee or director is, or was, serving at the Company’s or the acquired
company’s request in such capacity. The term of the indemnification
period is for the officer’s, employee’s or director’s lifetime. The
maximum potential amount of future payments the Company could be required to
make under these indemnification agreements is generally unlimited; however, the
Company has a Director and Officer insurance policy that may reduce its exposure
and enable it to recover all or a portion of any future amounts
paid. As a result of its insurance policy coverage, the Company
believes the estimated fair value of these indemnification agreements is
minimal. The Company has no liabilities recorded for these agreements
as of March 29, 2009 or December 28, 2008, as these liabilities are
not reasonably estimable even though liabilities under these agreements are not
remote.
The
Company and Toshiba have agreed to mutually contribute to, and indemnify each
other and Flash Ventures for environmental remediation costs or liability
resulting from Flash Ventures’ manufacturing operations in certain
circumstances. The Company and Toshiba have also entered into a
Patent Indemnification Agreement under which in many cases the Company will
share in the expenses associated with the defense and cost of settlement
associated with such claims. This agreement provides limited
protection for the Company against third party claims that NAND flash memory
products manufactured and sold by Flash Ventures infringes third party
patents. The Company has not made any indemnification payments under
any such agreements and as of March 29, 2009, no amounts have been accrued
in the accompanying Condensed Consolidated Financial Statements with respect to
these indemnification guarantees.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Contractual
Obligations and Off-Balance Sheet Arrangements
The
following tables summarize the Company’s contractual cash obligations,
commitments and off-balance sheet arrangements at March 29, 2009, and the
effect such obligations are expected to have on its liquidity and cash flows in
future periods.
Contractual
Obligations.
|
|
|
|
|
1
Year or Less
(9
months)
|
|
|
2
- 3 Years
(Fiscal
2010
and
2011)
|
|
|
4
–5 Years
(Fiscal
2012
and
2013)
|
|
|
More
than 5 Years (Beyond
Fiscal
2013)
|
|
|
|
(In
thousands)
|
|
Operating
leases
|
|
$ |
32,373 |
|
|
$ |
6,834 |
|
|
$ |
14,383 |
|
|
$ |
6,006 |
|
|
$ |
5,150 |
|
Flash
Partners reimbursement for certain fixed costs including
depreciation
|
|
|
1,243,310 |
(3) |
|
|
332,301 |
|
|
|
693,469 |
|
|
|
182,158 |
|
|
|
35,382 |
|
Flash
Alliance reimbursement for certain fixed costs including
depreciation
|
|
|
1,318,617 |
(3)
|
|
|
300,205 |
|
|
|
623,051 |
|
|
|
353,958 |
|
|
|
41,403 |
|
Toshiba
research and development
|
|
|
11,076 |
(3)
|
|
|
11,076 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Capital
equipment purchase commitments
|
|
|
12,122 |
|
|
|
11,914 |
|
|
|
208 |
|
|
|
— |
|
|
|
— |
|
Convertible
notes principal and interest (1)
|
|
|
1,273,101 |
|
|
|
9,188 |
|
|
|
98,158 |
|
|
|
23,000 |
|
|
|
1,142,755 |
|
Operating
expense commitments
|
|
|
68,352 |
|
|
|
56,340 |
|
|
|
8,939 |
|
|
|
3,073 |
|
|
|
— |
|
Noncancelable
production purchase commitments (2)
|
|
|
272,135 |
(3)
|
|
|
272,135 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total
contractual cash obligations
|
|
$ |
4,231,086 |
|
|
$ |
999,993 |
|
|
$ |
1,438,208 |
|
|
$ |
568,195 |
|
|
$ |
1,224,690 |
|
Off-Balance
Sheet Arrangements.
|
|
|
|
|
|
(In
thousands)
|
|
Guarantee
of Flash Partners equipment leases (4)
|
|
$ |
638,823 |
|
Guarantee
of Flash Alliance equipment leases (4)
|
|
|
592,298 |
|
_________________
(1)
|
In
May 2006, the Company issued and sold $1.15 billion in aggregate
principal amount of 1% Notes due 2013. The Company will pay
cash interest at an annual rate of 1%, payable semi-annually on
May 15 and November 15 of each year until calendar year
2013. In November 2006, through its acquisition of msystems
Ltd., (“msystems”), the Company assumed msystems’ $75 million in
aggregate principal amount of 1% Notes due 2035. The Company
will pay cash interest at an annual rate of 1%, payable semi-annually on
March 15 and September 15 of each year. In addition,
the expected maturity of the 1% Notes due 2035 has been adjusted to March
15, 2010 as holders have an option to put these notes on this date and, as
a result, only interest payments through March 15, 2010 have been included
as an obligation.
|
(2)
|
Includes
Toshiba foundries, Flash Ventures, related party vendors and other silicon
source vendor purchase
commitments.
|
(3)
|
Includes
amounts denominated in Japanese yen, which are subject to fluctuation in
exchange rates prior to payment and have been translated using the
exchange rate at March 29,
2009.
|
(4)
|
The
Company’s guarantee obligation, net of cumulative lease payments, is
120.3 billion Japanese yen, or approximately $1.23 billion based
upon the exchange rate at March 29,
2009.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
The
Company has excluded $157.3 million of unrecognized tax benefits from the
contractual obligation table above due to the uncertainty with respect to the
timing of associated future cash flows at March 29, 2009. The
Company is unable to make reasonable reliable estimates of the period of cash
settlement with the respective taxing authorities.
The
Company leases many of its office facilities and operating equipment for various
terms under long-term, noncancelable operating lease agreements. The
leases expire at various dates from fiscal year 2009 through fiscal year
2016. Future minimum lease payments at March 29, 2009 are
presented below (in thousands):
Fiscal Year
|
|
|
|
2009
(9 months)
|
|
$ |
7,501 |
|
2010
|
|
|
8,760 |
|
2011
|
|
|
6,645 |
|
2012
|
|
|
4,982 |
|
2013
|
|
|
3,279 |
|
2014
and thereafter
|
|
|
5,150 |
|
|
|
|
36,317 |
|
Sublease
income to be received in the future under noncancelable
subleases
|
|
|
(3,944 |
) |
Net
operating leases
|
|
$ |
32,373 |
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
13.
|
Related
Parties and Strategic Investments
|
Toshiba. The
Company and Toshiba have collaborated in the development and manufacture of NAND
flash memory products. These NAND flash memory products are
manufactured by Toshiba at Toshiba’s Yokkaichi, Japan operations using the
semiconductor manufacturing equipment owned or leased by FlashVision, Flash
Partners and Flash Alliance. See also Note 12, “Commitments,
Contingencies and Guarantees.” The Company purchased NAND flash memory
wafers from FlashVision, Flash Partners, Flash Alliance and Toshiba, made
payments for shared research and development expenses and made loans
to Flash Partners and Flash Alliance totaling approximately $576.8 million
and $460.4 million in the three months ended March 29, 2009 and
March 30, 2008, respectively. The Company received loan
repayments from Flash Partners and Flash Alliance of $277.1 million in the
three months ended March 29, 2009. See Note 12, “Commitments,
Contingencies and Guarantees – Flash Ventures,” for further discussion regarding
Flash Ventures restructuring.
The
purchases of NAND flash memory wafers are ultimately reflected as a component of
the Company’s Cost of Product Revenues. During the three months ended
March 29, 2009 and March 30, 2008, the Company had sales to Toshiba of zero
and $5.4 million, respectively. At March 29, 2009 and
December 28, 2008, the Company had accounts receivable balances from
Toshiba of zero and $2.2 million, respectively. At
March 29, 2009 and December 28, 2008, the Company had accrued current
liabilities due to Toshiba for shared research and development expenses of
$2.0 million and $4.0 million, respectively.
Flash Ventures
with Toshiba. The Company owns 49.9% of each of the flash
ventures with Toshiba (FlashVision, Flash Partners and Flash Alliance) and
accounts for its ownership position under the equity method of
accounting. The Company’s obligations with respect to Flash Partners
and Flash Alliance master lease agreements, take-or-pay supply arrangements and
research and development cost sharing are described in Note 12, “Commitments,
Contingencies and Guarantees.” Flash Partners and Flash Alliance are
variable interest entities as defined under FIN 46R; however, the Company
is not the primary beneficiary of either Flash Partners or Flash Alliance
because it absorbs less than a majority of the expected gains and losses of each
entity. At March 29, 2009 and December 28, 2008, the
Company had accounts payable balances due to FlashVision, Flash Partners and
Flash Alliance of $299.9 million and $370.4 million,
respectively. For activity related to the wind-down of FlashVision,
see Note 12, “Commitments, Contingencies and Guarantees.”
The
Company’s maximum reasonably estimable loss exposure (excluding lost profits) as
a result of its involvement with the flash ventures with Toshiba are presented
below (in millions):
|
|
|
|
|
|
|
Notes
Receivable
|
|
$ |
1,076 |
|
|
$ |
1,120 |
|
Equity
Investments
|
|
|
392 |
|
|
|
482 |
|
Operating
lease guarantees (1)
|
|
|
1,231 |
|
|
|
2,095 |
|
Maximum
loss exposure
|
|
$ |
2,699 |
|
|
$ |
3,697 |
|
(1)
|
Based
upon the exchange rate at each respective balance sheet
date.
|
Tower
Semiconductor. As of December 28, 2008, Tower Semiconductor
Ltd. (“Tower”), one of the Company’s suppliers of wafers for its controller
components, ceased being a related party as the Company’s ownership was less
than 10% of Tower’s outstanding shares. The Company purchased
controller wafers and related non-recurring engineering of approximately
$12.2 million in the three months ended March 30, 2008. The
purchases of controller wafers are ultimately reflected as a component of the
Company’s Cost of Product Revenues. At December 28, 2008, the
Company had a receivable from Tower of $0.4 million and an outstanding loan
secured by equipment to Tower of $3.0 million.
Solid State
Storage Solutions LLC. During the second quarter of fiscal
year 2007, the Company formed a venture with third parties that licenses
intellectual property. This venture qualifies as a variable interest
entity under FIN 46R. The Company is considered the primary
beneficiary of this venture, and in accordance with FIN 46R, the Company
consolidates this venture in its Condensed Consolidated Financial
Statements. The venture was financed with $10.2 million of
initial aggregate capital contributions from the partners. In
July 2007, Solid State Storage Solutions LLC invested $10.0 million
for the acquisition of intellectual property and related amortization for the
three months ended March 29, 2009 and March 30, 2008 was
$0.8 million. The venture has an obligation of up to an
additional $32.5 million related to the acquisition of intellectual
property should the venture be profitable.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
The flash
memory industry is characterized by significant litigation seeking to enforce
patent and other intellectual property rights. The Company's patent
and other intellectual property rights are primarily responsible for generating
license and royalty revenue. The Company seeks to protect its
intellectual property through patents, copyrights, trademarks, trade secret
laws, confidentiality agreements and other methods, and has been, and likely
will, continue to enforce such rights as appropriate through litigation and
related proceedings. The Company expects that its competitors and
others who hold intellectual property rights related to its industry will pursue
similar strategies against it in litigation and related
proceedings. From time-to-time, it has been and may continue to be
necessary to initiate or defend litigation against third
parties. These and other parties could bring suit against the
Company. In each case listed below where the Company is the
defendant, the Company intends to vigorously defend the action. At
this time, the Company does not believe it is reasonably possible that losses
related to the litigation described below have occurred beyond the amounts, if
any, that have been accrued.
On
October 15, 2004, the Company filed a complaint for patent infringement and
declaratory judgment of non-infringement and patent invalidity against
STMicroelectronics N.V. and STMicroelectronics, Inc. (collectively, “ST”) in the
United States District Court for the Northern District of California, captioned
SanDisk Corporation v. STMicroelectronics, Inc., et al., Civil Case No. C
04 04379 JF. The complaint alleges that ST’s products infringe one of
the Company’s U.S. patents, U.S. Patent No. 5,172,338 (the “’338 patent”),
and also alleges that several of ST’s patents are invalid and not
infringed. On June 18, 2007, the Company filed an amended complaint,
removing several of the Company’s declaratory judgment claims. At a
case management conference conducted on June 29, 2007, the parties agreed that
the remaining declaratory judgment claims would be dismissed pursuant to a
settlement agreement in two matters being litigated in the Eastern District of
Texas (Civil Case No. 4:05CV44 and Civil Case No. 4:05CV45, discussed
below). The parties also agreed that the ’338 patent and a second
Company patent, presently at issue in Civil Case No. C0505021 JF (discussed
below), will be litigated together in this case. ST filed an answer
and counterclaims on September 6, 2007. ST’s counterclaims
included assertions of antitrust violations. On October 19, 2007, the
Company filed a motion to dismiss ST’s antitrust counterclaims, which the Court
later converted into a motion for summary judgment. On
December 20, 2007, the Court entered a stipulated order staying all
procedural deadlines. On October 17, 2008, the Court issued an order
granting in part and denying in part the Company’s motion for summary judgment
on ST’s antitrust counterclaims. On April 16, 2009, the Court held a
Case Management Conference at which it addressed SanDisk’s motion for leave to
amend its complaint to assert two additional U.S. patents owned by the Company
and ST’s motion to bifurcate the case for discovery and trial. The
Court has not yet issued a ruling on these motions. The Court has not
yet established new procedural deadlines in this matter.
On
October 14, 2005, STMicroelectronics, Inc. (“STMicro”) filed a complaint against
the Company and the Company’s CEO, Dr. Eli Harari, in the Superior Court of the
State of California for the County of Alameda, captioned STMicroelectronics,
Inc. v. Harari, Case No. HG 05237216 (the “Harari Matter”). The
case was subsequently transferred to Santa Clara County Superior Court, where it
is assigned Case No. 1-07-CV-080123. The complaint alleges that
STMicro, as the successor to Wafer Scale Integration, Inc.’s (“WSI”) legal
rights, has an ownership interest in several Company patents that were issued
from applications naming Dr. Harari, a former WSI employee, as an
inventor. The complaint seeks the assignment or co-ownership of
certain inventions and patents conceived of by Dr. Harari, including some of the
patents asserted by the Company in its litigations against STMicro, as well as
damages in an unspecified amount. On January 30, 2009, the Company
and Dr. Harari filed a motion for summary judgment on the ground that STMicro’s
claims are time-barred. The Court denied this motion on April 20,
2009 on the ground there were triable issues of fact. The trial has
been set for September 8, 2009.
On
December 6, 2005, the Company filed a complaint for patent infringement in
the United States District Court for the Northern District of California against
ST (Case No. C0505021 JF). In the suit, the Company seeks
damages and injunctions against ST from making, selling, importing or using
flash memory chips or products that infringe the Company’s U.S. Patent
No. 5,991,517 (the “’517 patent”). As discussed above, the ’517
patent will be litigated together with the ’338 patent in Civil Case No. C
04 04379JF.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
On
September 11, 2006, Mr. Rabbi, a shareholder of msystems Ltd. (“msystems”),
a company subsequently acquired by the Company in or about November 2006, filed
a derivative action in Israel and a motion to permit him to file the derivative
action against msystems and four directors of msystems arguing that options were
allegedly allocated to officers and employees of msystems in violation of
applicable law. Mr. Rabbi claimed that the aforementioned actions
allegedly caused damage to msystems. On January 25, 2007, SanDisk IL
Ltd. (“SDIL”), successor in interest to msystems, filed a motion to dismiss the
motion to seek leave to file the derivative action and the derivative action on
the grounds, inter alia, that Mr. Rabbi ceased to be a shareholder of
msystems after the merger between msystems and the Company. On
March 12, 2008, the court granted SDIL’s motion and dismissed the motion to
seek leave to file the derivative action and consequently, the derivative action
itself was dismissed. On May 15, 2008, Mr. Rabbi filed an appeal with
the Supreme Court of Israel. The parties submitted their written summations and
the oral hearing in the Supreme Court is set for March 10, 2010.
On
September 11, 2007, the Company and the Company’s CEO, Dr. Eli Harari,
received grand jury subpoenas issued from the United States District Court for
the Northern District of California indicating a Department of Justice
investigation into possible antitrust violations in the NAND flash memory
industry. The Company also received a notice from the Canadian
Competition Bureau (“Bureau”) that the Bureau has commenced an industry-wide
investigation with respect to alleged anti-competitive activity regarding the
conduct of companies engaged in the supply of NAND flash memory chips to Canada
and requesting that the Company preserve any records relevant to such
investigation. The Company is cooperating in these
investigations.
On
September 11, 2007, Premier International Associates LLC (“Premier”) filed
suit against the Company and 19 other named defendants, including Microsoft
Corporation, Verizon Communications Inc. and AT&T Inc., in the United States
District Court for the Eastern District of Texas (Marshall
Division). The suit, Case No. 2-07-CV-396, alleges infringement
of Premier's U.S. Patents 6,243,725 (the “’725”) and 6,763,345 (the “’345”) by
certain of the Company’s portable digital music players, and seeks an injunction
and damages in an unspecified amount. On December 10, 2007, an
amended complaint was filed. On February 5, 2008, the Company filed
an answer to the amended complaint and counterclaims: (a) denying infringement;
(b) seeking a declaratory judgment that the ’725 and ’345 patents are invalid,
unenforceable and not infringed by the Company. On February 5, 2008,
the Company, along with the other defendants in the action, filed a motion to
stay the litigation pending completion of reexaminations of the ’725 and ’345
patents by the U.S. Patent and Trademark Office. This motion was
granted and on June 4, 2008, the action is currently stayed. The U.S.
Patent and Trademark Office has issued final office actions cancelling all
claims of one of the patents in suit, and confirming certain claims of the other
patent in suit. On April 16, 2009, Premier requested that the Court
lift the stay. That request is pending.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
On
October 24, 2007, the Company filed a complaint under Section 337 of the Tariff
Act of 1930 (as amended) (Inv. No. 337-TA-619) titled, “In the matter of
flash memory controllers, drives, memory cards, and media players and products
containing same” in the ITC (hereinafter, “the 619 Investigation”), naming the
following companies as respondents: Phison Electronics Corp.
(“Phison”); Silicon Motion Technology Corp., Silicon Motion, Inc. (Taiwan),
Silicon Motion, Inc. (California), and Silicon Motion International, Inc.
(collectively, “Silicon Motion”); USBest Technology, Inc. dba Afa Technologies,
Inc. (“USBest”); Skymedi Corp. (“Skymedi”); Chipsbrand Microelectronics (HK)
Co., Ltd., Chipsbank Technology (Shenzhen) Co., Ltd., and Chipsbank
Microelectronics Co., Ltd., (collectively, “Chipsbank”); Zotek Electronic Co.,
Ltd., dba Zodata Technology Ltd. (collectively, “Zotek”); Infotech Logistic LLC
(“Infotech”); Power Quotient International Co., Ltd., and PQI Corp.
(collectively, “PQI”); Power Quotient International (HK) Co., Ltd.; Syscom
Development Co. Ltd.; PNY Technologies, Inc. (“PNY”); Kingston Technology Co.,
Inc., Kingston Technology Corp., Payton Technology Corp., and MemoSun, Inc.
(collectively, “Kingston”); Buffalo, Inc., Melco Holdings, Inc., and Buffalo
Technology (USA), Inc. (collectively, “Buffalo”); Verbatim Corp. (“Verbatim”);
Transcend Information Inc. (Taiwan), Transcend Information Inc. (California),
and Transcend Information Maryland, Inc., (collectively, “Transcend”); Imation
Corp., Imation Enterprises Corp., and Memorex Products, Inc. (collectively,
“Imation”); Add-On Computer Peripherals, Inc. and Add-On Computer Peripherals,
LLC (collectively, “Add-On Computer Peripherals”); Add-On Technology Co.; A-Data
Technology Co., Ltd., and A-Data Technology (USA) Co., Ltd., (collectively,
“A-DATA”); Apacer Technology Inc. and Apacer Memory America, Inc. (collectively,
“Apacer”); Acer, Inc. (“Acer”); Behavior Tech Computer Corp. and Behavior Tech
Computer (USA) Corp. (collectively, “Behavior”); Emprex Technologies
Corp.(“Emprex”); Corsair Memory, Inc. (“Corsair”); Dane-Elec Memory S.A., and
Dane-Elec Corp. USA, (collectively, “Dane-Elec”); Deantusaiocht Dane-Elec TEO;
EDGE Tech Corp. (“EDGE”); Interactive Media Corp, (“Interactive”); Kaser Corp.
(“Kaser”); LG Electronics, Inc., and LG Electronics U.S.A., Inc., (collectively,
“LG”); TSR Silicon Resources Inc. (“TSR”); and Welldone Co.
(“Welldone”). In the complaint, the Company asserts that respondents’
accused flash memory controllers, drives, memory cards, and media players
infringe the following: U.S. Patent No. 5,719,808 (the “’808 patent”); U.S.
Patent No. 6,763,424 (the “’424 patent”); U.S. Patent No. 6,426,893
(the “’893 patent”); U.S. Patent No. 6,947,332 (the “’332 patent”); and
U.S. Patent No. 7,137,011 (the “’011 patent”). The Company seeks
an order excluding the accused products from entry into the United States as
well as a permanent cease and desist order against the
respondents. Since filing its complaint, the Company has terminated
the investigation as to the’808 patent, the ’893 patent, and the ’332
patent. After filing its complaint, the Company reached settlement
agreements with Add-On Computer Peripherals, EDGE, Infotech, Interactive, Kaser,
PNY, TSR, Verbatim, Chipsbank, USBest and Welldone. The investigation
has been terminated as to these respondents in light of these settlement
agreements. Three of the remaining respondents – Buffalo, Corsair,
and A-Data – were terminated from the investigation after entering consent
orders. The investigation has also been terminated as to Add-On Tech.
Co., Behavior, Emprex, and Zotek after these respondents were found in
default. The investigation has also been terminated as to Acer,
Payton, Silicon Motion Tech. Corp., and Silicon Motion, Int’l
Inc. The Company also terminated PQI from the investigation as to the
’011 patent. On July 15, 2008, the ALJ issued a Markman ruling
regarding the ’011 patent, the ’893 patent, the ’332 patent, and the ’424
patent. Beginning October 27, 2008, the ALJ held an evidentiary
hearing. On February 9, 2009, the ALJ extended the target date for
conclusion of the investigation to August 10,
2009. On April 10, 2009, the ALJ issued an Initial
Determination. Among other findings, the ALJ found that the
Respondents did not infringe either the ’424 patent or the ’011
patent. The ALJ also found that claim 8 of the ’011 patent was
obvious and, thus, invalid over the prior art. The ALJ further found
that the Company had a domestic industry in both the ’424 patent and the ’011
patent. The ALJ also denied the Respondents’ patent misuse and patent
exhaustion defenses. On April 14, 2009, the ITC granted the Company’s
request for an extension to file a petition for review. The Company’s
petition for review is now due on May 4, 2009 while its response to any petition
filed by another party is due on May 18, 2009.
On
October 24, 2007, the Company filed a complaint for patent infringement in the
United States District Court for the Western District of Wisconsin against the
following defendants: Phison, Silicon Motion, Synergistic Sales, Inc.
(“Synergistic”), USBest, Skymedi, Chipsbank, Infotech, Zotek, PQI, PNY,
Kingston, Buffalo, Verbatim, Transcend, Imation, Add-On Computer Peripherals,
A-DATA, Apacer, Behavior, Corsair, Dane-Elec, EDGE, Interactive, LG, TSR and
Welldone. In this action, Case No. 07-C-0607-C, the Company
asserts that the defendants infringe the ’808 patent, the ’424 patent, the ’893
patent, the ’332 patent and the ’011 patent. The Company seeks
damages and injunctive relief. In light of the above mentioned
settlement agreements, the Company dismissed its claims against Add-On Computer
Peripherals, EDGE, Infotech, Interactive, PNY, TSR and Welldone. The
Company also voluntarily dismissed its claims against Acer and Synergistic
without prejudice. The Company also voluntarily dismissed its claims
against Corsair in light of its agreement to sell flash memory products only
under license or consent from the Company. On November 21,
2007, defendant Kingston filed a motion to stay this action. Several
defendants joined in Kingston’s motion. On December 19, 2007,
the Court issued an order staying the case in its entirety until the 619
Investigation becomes final. On January 14, 2008, the Court issued an
order clarifying that the entire case is stayed for all
parties.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
On
October 24, 2007, the Company filed a complaint for patent infringement in the
United States District Court for the Western District of Wisconsin against the
following defendants: Phison, Silicon Motion, Synergistic, USBest, Skymedi,
Zotek, Infotech, PQI, PNY, Kingston, Buffalo, Verbatim, Transcend, Imation,
A-DATA, Apacer, Behavior, and Dane-Elec. In this action, Case
No. 07-C-0605-C, the Company asserts that the defendants infringe U.S.
Patent No. 6,149,316 (the “’316 patent”) and U.S. Patent No. 6,757,842
(the “’842 patent”). The Company seeks damages and injunctive
relief. In light of above mentioned settlement agreements, the
Company dismissed its claims against Infotech and PNY. The Company
also voluntarily dismissed its claims against Acer and Synergistic without
prejudice. On November 21, 2007, defendant Kingston filed a motion to
consolidate and stay this action. Several defendants joined in
Kingston’s motion. On December 17, 2007, the Company filed an
opposition to Kingston’s motion. That same day, several defendants
filed another motion to stay this action. On January 7, 2008, the
Company opposed the defendants’ second motion to stay. On January 22,
2008, defendants Phison, Skymedi and Behavior filed motions to dismiss the
Company’s complaint for lack of personal jurisdiction. That same day,
defendants Phison, Silicon Motion, USBest, Skymedi, PQI, Kingston, Buffalo,
Verbatim, Transcend, A-DATA, Apacer, and Dane-Elec answered the Company’s
complaint denying infringement and raising several affirmative
defenses. These defenses included, among others, lack of personal
jurisdiction, improper venue, lack of standing, invalidity, unenforceability,
express license, implied license, patent exhaustion, waiver, latches, and
estoppel. On January 24, 2008, Silicon Motion filed a motion to
dismiss the Company’s complaint for lack of personal jurisdiction. On
January 25, 2008, Dane-Elec also filed a motion to dismiss the Company’s
complaint for lack of personal jurisdiction. On January 28, 2008, the
Court issued an order staying the case in its entirety with respect to all
parties until the proceeding in the 619 Investigation become
final. In its order, the Court also consolidated this action (Case
Nos. 07-C-0605-C) with the action discussed in the preceding paragraph
(07-C-0607-C).
Between
August 31, 2007 and December 14, 2007, the Company (along with a number of
other manufacturers of flash memory products) was sued in the Northern District
of California, in eight purported class action complaints. On
February 7, 2008, all of the civil complaints were consolidated into two
complaints, one on behalf of direct purchasers and one on behalf of indirect
purchasers, in the Northern District of California in a purported class action
captioned In re Flash Memory Antitrust Litigation, Civil Case
No. C07-0086. Plaintiffs allege the Company and a number of
other manufacturers of flash memory products conspired to fix, raise, maintain,
and stabilize the price of NAND flash memory in violation of state and federal
laws. The lawsuits purport to be on behalf of purchasers of flash
memory between January 1, 1999 through the present. The lawsuits seek
an injunction, damages, restitution, fees, costs, and disgorgement of
profits. On April 8, 2008, the Company, along with co-defendants,
filed motions to dismiss the direct purchaser and indirect purchaser
complaints. Also on April 8, 2008, the Company, along with
co-defendants, filed a motion for a protective order to stay
discovery. On April 22, 2008, direct and indirect purchaser
plaintiffs filed oppositions to the motions to dismiss. The
Company’s, along with co-defendants’, reply to the oppositions was filed May 13,
2008. On March 31, 2009, the Court denied the motions, except that it
granted dismissal of some of the indirect purchasers’ various state law
claims. The Court allowed leave to amend with respect to some of the
dismissed claims; the amended complaint was filed on May 1, 2009.
On
November 6, 2007, Gil Mosek, a former employee of SanDisk IL Ltd. (“SDIL”),
filed a lawsuit against SDIL, Dov Moran and Amir Ban in the Tel-Aviv District
Court, claiming that he and Amir Ban, another former employee of SDIL, reached
an agreement according to which a jointly-held company should have been
established together with SDIL. According to Mr. Mosek, SDIL knew about the
agreement, approved it and breached it, while deciding not to establish the
jointly-held company. On January 1, 2008, SDIL filed a statement of
defense. Simultaneously, SDIL filed a request to dismiss the lawsuit, claiming
that Mr. Mosek signed a waiver in favor of SDIL, according to which he has no
claim against SDIL. On February 12, 2008, Mr. Mosek filed a request
to allow him to present certain documents, which contain confidential
information of SDIL. On February 26, 2008, SDIL opposed this request,
claiming that SDIL’s documents are the sole property of SDIL and Mr. Mosek has
no right to hold and to use them. On March 6, 2008, the court decided
that Mr. Mosek has to pay a fee according to the estimated amount of the
claim. On April 3, 2008, Mr. Mosek filed a request to amend the claim
by setting the claim on an amount of NIS 3,000,000. On April 9, 2008,
SDIL filed its response to this request, according to which it has no objection
to the amendment, subject to the issuance of an order for costs. On
April 10, 2008, the Court accepted Mr. Mosek’s request. According to
the settlement agreement, reached between the SDIL and Amir Ban in January 2008,
Amir Ban shall indemnify and hold SDIL harmless with regard to the claim filed
by Mosek, as described in this section above. At a pre-trial hearing
held on February 9, 2009, the Court indicated that Mr. Mosek should transfer his
claim to the Tel-Aviv Labor Court due to the District Court’s lack of
jurisdiction. On April 16, 2009 the court ruled that the claim will
be transferred to the Labor Court which will have to rule with respect to SDIL's
motion for dismissal of the claim due to the release form which Mosek signed
when he left the Company.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
On
September 14, 2008, Daniel Harkabi and Gidon Elazar, former employees and
founders of MDRM, Inc., filed a breach of contract action in the U.S. District
Court for the Southern District of New York seeking earn-out payments of
approximately $3.8 million in connection with SanDisk’s acquisition of
MDRM, Inc. in fiscal year 2004. The Company filed its answer on
November 14, 2008 and discovery is proceeding.
On
October 1, 2008, NorthPeak Wireless LLC (“NorthPeak”) filed suit against the
Company and 30 other named defendants including Dell, Inc., Fujitsu Computer
Systems Corp., Gateway, Inc., Hewlett-Packard Company and Toshiba America, Inc.,
in the United States District Court for the Northern District of Alabama,
Northeastern Division. The suit, Case No. CV-08-J-1813, alleges
infringement of U.S. Patents 4,977,577 and 5,978,058 by certain of the Company’s
discontinued wireless electronic products. On January 21, 2009, the
Court granted a motion by the defendants to transfer the case to the United
States District Court for the Northern District of California, where it is now
Case No. 3:09-CV-01813. An initial case management conference is
scheduled for May 29, 2009.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
15.
|
Condensed
Consolidating Financial Statements
|
As part
of the acquisition of msystems Ltd. (hereinafter referred to as “SanDisk IL
Ltd.,” “SDIL,” or “Other Guarantor Subsidiary”) in November 2006, the Company
entered into a supplemental indenture whereby the Company became an additional
obligor and guarantor of the assumed $75 million 1% Notes due 2035 issued
by M-Systems Finance, Inc. (the “Subsidiary Issuer” or “mfinco”) and guaranteed
by SDIL. The Company’s (the “Parent Company”) guarantee is full and
unconditional, and joint and several with SDIL. Both SDIL and mfinco
are wholly-owned subsidiaries of the Company. The following Condensed
Consolidating Financial Statements present separate information for mfinco as
the subsidiary issuer, the Company and SDIL as guarantors and the Company’s
other combined non-guarantor subsidiaries, and should be read in conjunction
with the Condensed Consolidated Financial Statements of the
Company.
These
Condensed Consolidating Financial Statements have been prepared using the equity
method of accounting. Earnings of subsidiaries are reflected in the
Company’s investment in subsidiaries account. The elimination entries
eliminate investments in subsidiaries, related stockholders’ equity and other
intercompany balances and transactions.
Condensed
Consolidating Statements of Operations
|
|
|
|
|
|
|
|
|
|
Other
Guarantor Subsidiary (1)
|
|
|
|
|
|
Consolidating
Adjustments
|
|
|
|
|
|
|
(In thousands)
|
|
Total
revenues
|
|
$ |
337,584 |
|
|
$ |
— |
|
|
$ |
23,125 |
|
|
$ |
1,022,559 |
|
|
$ |
(723,797 |
) |
|
$ |
659,471 |
|
Total
cost of revenues
|
|
|
405,284 |
|
|
|
— |
|
|
|
1,685 |
|
|
|
937,004 |
|
|
|
(683,363 |
) |
|
|
660,610 |
|
Gross
profit (loss)
|
|
|
(67,700 |
) |
|
|
— |
|
|
|
21,440 |
|
|
|
85,555 |
|
|
|
(40,434 |
) |
|
|
(1,139 |
) |
Total
operating expenses
|
|
|
122,054 |
|
|
|
— |
|
|
|
18,671 |
|
|
|
62,394 |
|
|
|
(38,923 |
) |
|
|
164,196 |
|
Operating
income (loss)
|
|
|
(189,754 |
) |
|
|
— |
|
|
|
2,769 |
|
|
|
23,161 |
|
|
|
(1,511 |
) |
|
|
(165,335 |
) |
Total
other income (expense)
|
|
|
(6,771 |
) |
|
|
(1 |
) |
|
|
2,250 |
|
|
|
(13,155 |
) |
|
|
(1,016 |
) |
|
|
(18,693 |
) |
Income
(loss) before provision for income taxes
|
|
|
(196,525 |
) |
|
|
(1 |
) |
|
|
5,019 |
|
|
|
10,006 |
|
|
|
(2,527 |
) |
|
|
(184,028 |
) |
Provision
for income taxes
|
|
|
7,606 |
|
|
|
— |
|
|
|
1,149 |
|
|
|
15,212 |
|
|
|
— |
|
|
|
23,967 |
|
|
|
|
(307 |
) |
|
|
— |
|
|
|
(94 |
) |
|
|
8,574 |
|
|
|
(8,173 |
) |
|
|
— |
|
Net
income (loss)
|
|
$ |
(204,438 |
) |
|
$ |
(1 |
) |
|
$ |
3,776 |
|
|
$ |
3,368 |
|
|
$ |
(10,700 |
) |
|
$ |
(207,995 |
) |
Condensed
Consolidating Statements of Operations
|
|
|
|
|
|
|
|
|
|
Other
Guarantor Subsidiary (1)
|
|
|
|
|
|
Consolidating
Adjustments
|
|
|
|
|
|
|
(In
thousands)
|
|
Total
revenues
|
|
$ |
473,229 |
|
|
$ |
— |
|
|
$ |
88,373 |
|
|
$ |
1,097,814 |
|
|
$ |
(809,449 |
) |
|
$ |
849,967 |
|
Total
cost of revenues
|
|
|
258,598 |
|
|
|
— |
|
|
|
48,959 |
|
|
|
1,029,006 |
|
|
|
(745,377 |
) |
|
|
591,186 |
|
Gross
profit
|
|
|
214,631 |
|
|
|
— |
|
|
|
39,414 |
|
|
|
68,808 |
|
|
|
(64,072 |
) |
|
|
258,781 |
|
Total
operating expenses
|
|
|
146,304 |
|
|
|
— |
|
|
|
43,859 |
|
|
|
127,755 |
|
|
|
(64,049 |
) |
|
|
253,869 |
|
Operating
income (loss)
|
|
|
68,327 |
|
|
|
— |
|
|
|
(4,445 |
) |
|
|
(58,947 |
) |
|
|
(23 |
) |
|
|
4,912 |
|
Total
other income
|
|
|
4,686 |
|
|
|
9 |
|
|
|
3,075 |
|
|
|
6,548 |
|
|
|
(433 |
) |
|
|
13,885 |
|
Income
(loss) before provision for (benefit from) income taxes
|
|
|
73,013 |
|
|
|
9 |
|
|
|
(1,370 |
) |
|
|
(52,399 |
) |
|
|
(456 |
) |
|
|
18,797 |
|
Provision
for (benefit from) income taxes
|
|
|
(972 |
) |
|
|
— |
|
|
|
3,346 |
|
|
|
5,462 |
|
|
|
1 |
|
|
|
7,837 |
|
|
|
|
(72,850 |
) |
|
|
— |
|
|
|
(1,404 |
) |
|
|
13,973 |
|
|
|
60,281 |
|
|
|
— |
|
Net
income (loss)
|
|
$ |
1,135 |
|
|
$ |
9 |
|
|
$ |
(6,120 |
) |
|
$ |
(43,888 |
) |
|
$ |
59,824 |
|
|
$ |
10,960 |
|
______________
(1)
|
This
represents legal entity results which exclude any subsidiaries required to
be consolidated under GAAP.
|
(3)
|
As
adjusted for the adoption of new accounting standards. See Note
1.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Condensed
Consolidating Balance Sheets
|
|
|
|
|
|
|
|
|
|
Other
Guarantor Subsidiary (1)
|
|
|
|
|
|
Consolidating
Adjustments
|
|
|
|
|
|
|
(In thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
659,706 |
|
|
$ |
62 |
|
|
$ |
19,106 |
|
|
$ |
411,205 |
|
|
$ |
— |
|
|
$ |
1,090,079 |
|
Short-term
investments
|
|
|
379,127 |
|
|
|
— |
|
|
|
15,961 |
|
|
|
— |
|
|
|
— |
|
|
|
395,088 |
|
Accounts
receivable, net
|
|
|
21,463 |
|
|
|
— |
|
|
|
1,168 |
|
|
|
86,464 |
|
|
|
— |
|
|
|
109,095 |
|
Inventory
|
|
|
68,804 |
|
|
|
— |
|
|
|
1,836 |
|
|
|
486,391 |
|
|
|
(4,861 |
) |
|
|
552,170 |
|
Other
current assets
|
|
|
377,344 |
|
|
|
— |
|
|
|
289,839 |
|
|
|
817,059 |
|
|
|
(1,243,048 |
) |
|
|
241,194 |
|
Total
current assets
|
|
|
1,506,444 |
|
|
|
62 |
|
|
|
327,910 |
|
|
|
1,801,119 |
|
|
|
(1,247,909 |
) |
|
|
2,387,626 |
|
Property
and equipment, net
|
|
|
192,241 |
|
|
|
— |
|
|
|
32,467 |
|
|
|
148,439 |
|
|
|
— |
|
|
|
373,147 |
|
Other
non-current assets
|
|
|
2,679,838 |
|
|
|
73,526 |
|
|
|
24,437 |
|
|
|
1,507,082 |
|
|
|
(1,777,856 |
) |
|
|
2,507,027 |
|
Total
assets
|
|
$ |
4,378,523 |
|
|
$ |
73,588 |
|
|
$ |
384,814 |
|
|
$ |
3,456,640 |
|
|
$ |
(3,025,765 |
) |
|
$ |
5,267,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
53,467 |
|
|
$ |
— |
|
|
$ |
1,769 |
|
|
$ |
373,079 |
|
|
$ |
60 |
|
|
$ |
428,375 |
|
Convertible
short-term debt
|
|
|
— |
|
|
|
75,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
75,000 |
|
Other
current accrued liabilities
|
|
|
492,707 |
|
|
|
1,977 |
|
|
|
20,267 |
|
|
|
1,284,200 |
|
|
|
(1,313,613 |
) |
|
|
485,538 |
|
Total
current liabilities
|
|
|
546,174 |
|
|
|
76,977 |
|
|
|
22,036 |
|
|
|
1,657,279 |
|
|
|
(1,313,553 |
) |
|
|
988,913 |
|
Convertible
long-term debt
|
|
|
892,314 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
892,314 |
|
Non-current
liabilities
|
|
|
155,840 |
|
|
|
— |
|
|
|
10,417 |
|
|
|
52,311 |
|
|
|
(9,087 |
) |
|
|
209,481 |
|
Total
liabilities
|
|
|
1,594,328 |
|
|
|
76,977 |
|
|
|
32,453 |
|
|
|
1,709,590 |
|
|
|
(1,322,640 |
) |
|
|
2,090,708 |
|
|
|
EQUITY
|
|
Stockholders’
equity
|
|
|
2,784,690 |
|
|
|
(3,389 |
) |
|
|
352,209 |
|
|
|
1,747,050 |
|
|
|
(1,703,125 |
) |
|
|
3,177,435 |
|
Non-controlling
interests
|
|
|
(495 |
) |
|
|
— |
|
|
|
152 |
|
|
|
— |
|
|
|
— |
|
|
|
(343 |
) |
Total
equity
|
|
|
2,784,195 |
|
|
|
(3,389 |
) |
|
|
352,361 |
|
|
|
1,747,050 |
|
|
|
(1,703,125 |
) |
|
|
3,177,092 |
|
Total
liabilities and equity
|
|
$ |
4,378,523 |
|
|
$ |
73,588 |
|
|
$ |
384,814 |
|
|
$ |
3,456,640 |
|
|
$ |
(3,025,765 |
) |
|
$ |
5,267,800 |
|
_________________
(1)
|
This
represents legal entity results which exclude any subsidiaries required to
be consolidated under GAAP.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Condensed
Consolidating Balance Sheets
|
|
|
|
|
|
|
|
|
|
Other
Guarantor Subsidiary (1)
|
|
|
|
|
|
Consolidating
Adjustments
|
|
|
|
|
|
|
(In thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
376,052 |
|
|
$ |
66 |
|
|
$ |
51,806 |
|
|
$ |
534,137 |
|
|
$ |
— |
|
|
$ |
962,061 |
|
Short-term
investments
|
|
|
443,632 |
|
|
|
— |
|
|
|
33,664 |
|
|
|
— |
|
|
|
— |
|
|
|
477,296 |
|
Accounts
receivable, net
|
|
|
76,733 |
|
|
|
— |
|
|
|
1,862 |
|
|
|
43,497 |
|
|
|
— |
|
|
|
122,092 |
|
Inventory
|
|
|
87,612 |
|
|
|
— |
|
|
|
1,573 |
|
|
|
511,740 |
|
|
|
(2,674 |
) |
|
|
598,251 |
|
Other
current assets
|
|
|
1,165,716 |
|
|
|
— |
|
|
|
209,861 |
|
|
|
1,424,708 |
|
|
|
(2,246,301 |
) |
|
|
553,984 |
|
Total
current assets
|
|
|
2,149,745 |
|
|
|
66 |
|
|
|
298,766 |
|
|
|
2,514,082 |
|
|
|
(2,248,975 |
) |
|
|
2,713,684 |
|
Property
and equipment, net
|
|
|
205,022 |
|
|
|
— |
|
|
|
33,478 |
|
|
|
158,487 |
|
|
|
— |
|
|
|
396,987 |
|
Other
non-current assets
|
|
|
2,778,895 |
|
|
|
73,710 |
|
|
|
69,797 |
|
|
|
1,564,731 |
|
|
|
(1,665,664 |
) |
|
|
2,821,469 |
|
Total
assets
|
|
$ |
5,133,662 |
|
|
$ |
73,776 |
|
|
$ |
402,041 |
|
|
$ |
4,237,300 |
|
|
$ |
(3,914,639 |
) |
|
$ |
5,932,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
81,014 |
|
|
$ |
— |
|
|
$ |
3,379 |
|
|
$ |
526,809 |
|
|
$ |
(211 |
) |
|
$ |
610,991 |
|
Other
current accrued liabilities
|
|
|
1,105,212 |
|
|
|
2,166 |
|
|
|
21,567 |
|
|
|
1,841,278 |
|
|
|
(2,318,205 |
) |
|
|
652,018 |
|
Total
current liabilities
|
|
|
1,186,226 |
|
|
|
2,166 |
|
|
|
24,946 |
|
|
|
2,368,087 |
|
|
|
(2,318,416 |
) |
|
|
1,263,009 |
|
Convertible
long-term debt
|
|
|
879,094 |
|
|
|
75,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
954,094 |
|
Non-current
liabilities
|
|
|
188,825 |
|
|
|
— |
|
|
|
17,963 |
|
|
|
75,964 |
|
|
|
(8,436 |
) |
|
|
274,316 |
|
Total
liabilities
|
|
|
2,254,145 |
|
|
|
77,166 |
|
|
|
42,909 |
|
|
|
2,444,051 |
|
|
|
(2,326,852 |
) |
|
|
2,491,419 |
|
|
|
EQUITY
|
|
Stockholders’
equity
|
|
|
2,879,517 |
|
|
|
(3,390 |
) |
|
|
358,981 |
|
|
|
1,793,249 |
|
|
|
(1,587,787 |
) |
|
|
3,440,570 |
|
Non-controlling
interests
|
|
|
— |
|
|
|
— |
|
|
|
151 |
|
|
|
— |
|
|
|
— |
|
|
|
151 |
|
Total
equity
|
|
|
2,879,517 |
|
|
|
(3,390 |
) |
|
|
359,132 |
|
|
|
1,793,249 |
|
|
|
(1,587,787 |
) |
|
|
3,440,721 |
|
Total
liabilities and equity
|
|
$ |
5,133,662 |
|
|
$ |
73,776 |
|
|
$ |
402,041 |
|
|
$ |
4,237,300 |
|
|
$ |
(3,914,639 |
) |
|
$ |
5,932,140 |
|
_________________
(1)
|
This
represents legal entity results which exclude any subsidiaries required to
be consolidated under GAAP.
|
(3)
|
As
adjusted for the adoption of new accounting standards. See Note
1.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)
Condensed
Consolidating Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
Other
Guarantor Subsidiary (1)
|
|
|
|
|
|
Consolidating
Adjustments
|
|
|
|
|
|
|
(In thousands)
|
|
Net
cash provided by (used in) operating activities
|
|
$ |
44,570 |
|
|
$ |
(4 |
) |
|
$ |
(76,585 |
) |
|
$ |
(82,242 |
) |
|
$ |
— |
|
|
$ |
(114,261 |
) |
Net
cash provided by (used in) investing activities
|
|
|
234,755 |
|
|
|
— |
|
|
|
43,885 |
|
|
|
(40,690 |
) |
|
|
— |
|
|
|
237,950 |
|
Net
cash provided by financing activities
|
|
|
4,570 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,570 |
|
Effect
of changes in foreign currency exchange rates on cash
|
|
|
(241 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(241 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
283,654 |
|
|
|
(4 |
) |
|
|
(32,700 |
) |
|
|
(122,932 |
) |
|
|
— |
|
|
|
128,018 |
|
Cash
and cash equivalents at beginning of period
|
|
|
376,052 |
|
|
|
66 |
|
|
|
51,806 |
|
|
|
534,137 |
|
|
|
— |
|
|
|
962,061 |
|
Cash
and cash equivalents at end of period
|
|
$ |
659,706 |
|
|
$ |
62 |
|
|
$ |
19,106 |
|
|
$ |
411,205 |
|
|
$ |
— |
|
|
$ |
1,090,079 |
|
Condensed
Consolidating Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
Other Guarantor
Subsidiary (1)
|
|
|
|
|
|
Consolidating
Adjustments
|
|
|
|
|
|
|
(In thousands)
|
|
Net
cash provided by (used in) operating activities
|
|
$ |
298,945 |
|
|
$ |
(150 |
) |
|
$ |
(1,587 |
) |
|
$ |
(78,575 |
) |
|
$ |
— |
|
|
$ |
218,633 |
|
Net
cash provided by (used in) investing activities
|
|
|
226,094 |
|
|
|
— |
|
|
|
(2,403 |
) |
|
|
(47,300 |
) |
|
|
— |
|
|
|
176,391 |
|
Net
cash provided by (used in) financing activities
|
|
|
7,231 |
|
|
|
— |
|
|
|
— |
|
|
|
(9,785 |
) |
|
|
— |
|
|
|
(2,554 |
) |
Effect
of changes in foreign currency exchange rates on cash
|
|
|
(399 |
) |
|
|
— |
|
|
|
— |
|
|
|
(535 |
) |
|
|
— |
|
|
|
(934 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
531,871 |
|
|
|
(150 |
) |
|
|
(3,990 |
) |
|
|
(136,195 |
) |
|
|
— |
|
|
|
391,536 |
|
Cash
and cash equivalents at beginning of period
|
|
|
389,337 |
|
|
|
215 |
|
|
|
90,639 |
|
|
|
353,558 |
|
|
|
— |
|
|
|
833,749 |
|
Cash
and cash equivalents at end of period
|
|
$ |
921,208 |
|
|
$ |
65 |
|
|
$ |
86,649 |
|
|
$ |
217,363 |
|
|
$ |
— |
|
|
$ |
1,225,285 |
|
_________________
(1)
|
This
represents legal entity results which exclude any subsidiaries required to
be consolidated under GAAP.
|
Statements
in this report, which are not historical facts, are forward-looking statements
within the meaning of the federal securities laws. These statements
may contain words such as “expects,” “anticipates,” “intends,” “plans,”
“believes,” “seeks,” “estimates” or other wording indicating future results or
expectations. Forward-looking statements are subject to significant
risks and uncertainties. Our actual results may differ materially
from the results discussed in these forward-looking
statements. Factors that could cause our actual results to differ
materially include, but are not limited to, those discussed under “Risk Factors”
in Part II, Item 1A of this report, and elsewhere in this report. Our
business, financial condition or results of operations could be materially
adversely affected by any of these or other factors. We
undertake no obligation to revise or update any forward-looking statements to
reflect any event or circumstance that arises after the date of this
report. References in this report to “SanDisk®,” “we,”
“our,” and “us” refer collectively to SanDisk Corporation, a Delaware
corporation, and its subsidiaries.
Overview
We are
the inventor of and worldwide leader in NAND-based flash storage
cards. Flash storage technology allows data to be stored in a
durable, compact format that retains the digital information even after the
power has been switched off. Our mission is to provide simple,
reliable and affordable storage at different capacities for consumer use in a
wide variety of formats and devices. We sell SanDisk branded products
for consumer electronics through broad global retail and original equipment
manufacturer, or OEM, distribution channels.
We
design, develop and manufacture products and solutions in a variety of form
factors using our flash memory, controller and firmware
technologies. We source the vast majority of our flash memory supply
through our significant flash venture relationships with Toshiba Corporation, or
Toshiba, which provide us with leading-edge, low-cost memory
wafers. Our card products are used in a wide range of consumer
electronics devices such as mobile phones, digital cameras, gaming devices and
laptop computers. We also provide high-speed and high-capacity
storage solutions, known as solid-state drives, or SSDs, that can be used in
lieu of hard disk drives in a variety of computing devices, including personal
computers and enterprise servers. We also produce Universal Serial
Bus, or USB, drives, and MP3 players as well as embedded flash storage products
that are used in a variety of systems for the enterprise, industrial, military
and other markets.
Our
strategy is to be an industry-leading supplier of flash storage solutions and to
develop large scale markets for flash-based storage products. We
maintain our technology leadership by investing in advanced technologies and
flash memory fabrication capacity in order to produce leading-edge, low-cost
flash memory for use in end-products that we design and market. We
are a one-stop-shop for our retail and OEM customers, selling all major flash
storage card formats for our target markets in high volumes.
Our
revenues are driven by the sale of our products and the licensing of our
intellectual property. We believe the market for flash storage is
price elastic, meaning that a decrease in the price per megabyte results in
demand for higher capacity products and the emergence of new applications for
flash storage. We continuously reduce the cost of NAND flash memory,
which we believe over time will enable new markets and expand existing markets
and allow us to achieve higher overall revenue. We seek to achieve
these cost reductions through technology improvements, primarily by increasing
the amount of memory stored in a given area of silicon.
On
December 29, 2008, we adopted Financial Accounting Standards Board Staff
Position, or FSP, APB 14-1, Accounting For Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement). We have separately accounted for the liability and
equity components of our 1% Senior Convertible Note due 2013 that may be settled
in cash upon conversion (including partial cash settlement) in a manner that
reflects our economic interest cost. In addition, we bifurcated the debt
into debt and equity components and will accrete the debt discount that will
result in the “economic interest cost” being reflected in our Condensed
Consolidated Statements of Operations. We have retrospectively applied FSP
APB 14-1 to all periods presented, from the issuance of the debt in May
2006, and have restated the Condensed Consolidated Financial Statements
presented in this report.
Results
of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions,
except percentages)
|
|
Product
revenues
|
|
$ |
588.1 |
|
|
|
89.2 |
% |
|
$ |
724.1 |
|
|
|
85.2 |
% |
License
and royalty revenues
|
|
|
71.4 |
|
|
|
10.8 |
% |
|
|
125.9 |
|
|
|
14.8 |
% |
Total
revenues
|
|
|
659.5 |
|
|
|
100.0 |
% |
|
|
850.0 |
|
|
|
100.0 |
% |
Cost
of product revenues
|
|
|
657.5 |
|
|
|
99.7 |
% |
|
|
576.6 |
|
|
|
67.8 |
% |
Amortization
of acquisition-related intangible assets
|
|
|
3.1 |
|
|
|
0.5 |
% |
|
|
14.6 |
|
|
|
1.7 |
% |
Total
cost of product revenues
|
|
|
660.6 |
|
|
|
100.2 |
% |
|
|
591.2 |
|
|
|
69.5 |
% |
Gross
profit (loss)
|
|
|
(1.1 |
) |
|
|
(0.2 |
%) |
|
|
258.8 |
|
|
|
30.5 |
% |
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
86.9 |
|
|
|
13.2 |
% |
|
|
111.4 |
|
|
|
13.1 |
% |
Sales
and marketing
|
|
|
37.9 |
|
|
|
5.7 |
% |
|
|
80.2 |
|
|
|
9.5 |
% |
General
and administrative
|
|
|
38.3 |
|
|
|
5.8 |
% |
|
|
57.8 |
|
|
|
6.8 |
% |
Amortization
of acquisition-related intangible assets
|
|
|
0.3 |
|
|
|
0.1 |
% |
|
|
4.5 |
|
|
|
0.5 |
% |
Restructuring
and other
|
|
|
0.8 |
|
|
|
0.1 |
% |
|
|
— |
|
|
|
— |
|
Total
operating expenses
|
|
|
164.2 |
|
|
|
24.9 |
% |
|
|
253.9 |
|
|
|
29.9 |
% |
Operating
income (loss)
|
|
|
(165.3 |
) |
|
|
(25.1 |
%) |
|
|
4.9 |
|
|
|
0.6 |
% |
Other
income (expense)
|
|
|
(18.7 |
) |
|
|
(2.8 |
%) |
|
|
13.9 |
|
|
|
1.6 |
% |
Income
(loss) before provision for taxes
|
|
|
(184.0 |
) |
|
|
(27.9 |
%) |
|
|
18.8 |
|
|
|
2.2 |
% |
Provision
for income taxes
|
|
|
24.0 |
|
|
|
3.6 |
% |
|
|
7.8 |
|
|
|
0.9 |
% |
Net
income (loss)
|
|
$ |
(208.0 |
) |
|
|
(31.5 |
%) |
|
$ |
11.0 |
|
|
|
1.3 |
% |
Product
Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions,
except percentages)
|
|
Retail
|
|
$ |
346.6 |
|
|
$ |
418.3 |
|
|
|
(17.1 |
%) |
OEM
|
|
|
241.5 |
|
|
|
305.8 |
|
|
|
(21.0 |
%) |
Product
revenues
|
|
$ |
588.1 |
|
|
$ |
724.1 |
|
|
|
(18.8 |
%) |
The
decrease in our product revenues for the three months ended March 29, 2009
as compared to the three months ended March 30, 2008 resulted from a 69%
reduction in average selling price per gigabyte, partially offset by a 166%
increase in the number of gigabytes sold.
The
decline in both retail and OEM product revenues for the three months ended
March 29, 2009 versus the comparable period in fiscal year 2008 was
primarily due to price declines not fully offset by higher unit
sales. While units sold and average capacity per unit have increased
from the prior year in both retail and OEM, significant price declines due to
supply exceeding demand negatively impacted the first quarter of fiscal year
2009 revenues. We currently expect that our average selling price per
gigabyte will be approximately stable or slightly higher in the second quarter
of fiscal year 2009 as compared to the first quarter of fiscal year
2009.
Our ten
largest customers represented approximately 44% of our total revenues in the
three months ended March 29, 2009 compared to 50% in the three months ended
March 30, 2008. No customer exceeded 10% of our total revenues
in the three months ended March 29, 2009. In the three months
ended March 30, 2008, revenue from Samsung Electronics Co. Ltd., or
Samsung, which included both license and royalty revenues and product revenues,
accounted for 13% of our total revenues.
Geographical
Product Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions,
except percentages)
|
|
United
States
|
|
$ |
214.0 |
|
|
|
36.4 |
% |
|
$ |
253.1 |
|
|
|
35.0 |
% |
|
|
(15.5 |
%) |
Japan
|
|
|
22.7 |
|
|
|
3.9 |
% |
|
|
49.5 |
|
|
|
6.8 |
% |
|
|
(54.2 |
%) |
Europe
and Middle East
|
|
|
151.0 |
|
|
|
25.6 |
% |
|
|
176.3 |
|
|
|
24.4 |
% |
|
|
(14.4 |
%) |
Asia-Pacific
|
|
|
188.2 |
|
|
|
32.0 |
% |
|
|
229.2 |
|
|
|
31.7 |
% |
|
|
(17.9 |
%) |
Other
foreign countries
|
|
|
12.2 |
|
|
|
2.1 |
% |
|
|
16.0 |
|
|
|
2.1 |
% |
|
|
(22.9 |
%) |
Product
revenues
|
|
$ |
588.1 |
|
|
|
100.0 |
% |
|
$ |
724.1 |
|
|
|
100.0 |
% |
|
|
(18.8 |
%) |
Product
revenues declined in all regions for the three months ended March 29, 2009
versus the comparable period in fiscal year 2008 due to aggressive industry
price declines. Unit sales increased in all regions except in Japan
where we had a decline in both OEM gaming and retail unit sales.
License
and Royalty Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions,
except percentages)
|
|
License
and royalty revenues
|
|
$ |
71.4 |
|
|
$ |
125.9 |
|
|
|
(43.3 |
%) |
More than
half of the decrease in our license and royalty revenues for the three months
ended March 29, 2009 over the comparable period of fiscal year 2008 was due
to lower flash memory revenue reported by our licensees. In addition,
our first quarter of fiscal 2009 royalty revenues were reduced by a prior period
adjustment identified by a licensee, which we are currently
reviewing. The licensee believes they incorrectly computed certain
royalties for periods prior to 2008, and this amount was offset against current
payments.
Gross
Profit (Loss) and Margin.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions,
except percentages)
|
|
Product
gross profit (loss)
|
|
$ |
(72.5 |
) |
|
$ |
132.9 |
|
|
|
(154.6 |
%) |
Product
gross margin (as a percent of product revenues)
|
|
|
(12.3 |
%) |
|
|
18.4 |
% |
|
|
|
|
Total
gross margin (as a percent of total revenues)
|
|
|
(0.2 |
%) |
|
|
30.5 |
% |
|
|
|
|
Product
gross margin for the three months ended March 29, 2009 was negative and
lower than the comparable period of fiscal year 2008 due primarily to aggressive
industry price declines exceeding cost declines, adverse effects of the
fluctuation of the Japanese yen to the U.S. dollar and charges of
$62.8 million for adverse purchase commitments associated with
under-utilization of Flash Ventures capacity for the 90-day period in which we
have non-cancelable orders. The first quarter of fiscal year 2009
product gross margin was favorably impacted by the release of inventory related
reserves of $33.8 million for product sold during the period and
adjustments to prior period Flash Ventures adverse purchase
commitments.
Research
and Development.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions,
except percentages)
|
|
Research
and development
|
|
$ |
86.9 |
|
|
$ |
111.4 |
|
|
|
(22.0 |
%) |
Percent
of revenue
|
|
|
13.2 |
% |
|
|
13.1 |
% |
|
|
|
|
Our
research and development expense reduction for the three months ended
March 29, 2009 versus the comparable period in fiscal year 2008 was due
primarily to lower employee-related expenses of $8.1 million due to
decreased headcount. In addition, we had a reduction of $12.9 million in
other expenses primarily due to lower usage of third-party engineering services
and engineering materials.
Sales
and Marketing.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions,
except percentages)
|
|
Sales
and marketing
|
|
$ |
37.9 |
|
|
$ |
80.2 |
|
|
|
(52.7 |
%) |
Percent
of revenue
|
|
|
5.7 |
% |
|
|
9.5 |
% |
|
|
|
|
Our sales
and marketing expense reduction for the three months ended March 29, 2009
versus the comparable period in fiscal year 2008 was primarily due to decreased
branding and merchandising costs of $35.6 million and lower
employee-related expenses of $5.2 million due to decreased
headcount.
General
and Administrative.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions,
except percentages)
|
|
General
and administrative
|
|
$ |
38.3 |
|
|
$ |
57.8 |
|
|
|
(33.7 |
%) |
Percent
of revenue
|
|
|
5.8 |
% |
|
|
6.8 |
% |
|
|
|
|
Our
general and administrative expense reduction for the three months ended
March 29, 2009 versus the comparable period in fiscal year 2008 was
primarily related to lower legal and outside advisors costs of
$11.4 million, lower bad debt expense of $3.6 million and lower
employee-related costs of $3.5 million due to decreased
headcount.
Amortization
of Acquisition-Related Intangible Assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions,
except percentages)
|
|
Amortization
of acquisition-related intangible assets
|
|
$ |
0.3 |
|
|
$ |
4.5 |
|
|
|
(93.3 |
%) |
Percent
of revenue
|
|
|
0.1 |
% |
|
|
0.5 |
% |
|
|
|
|
Amortization
of acquisition-related intangible assets was lower in the three months ended
March 29, 2009 compared to the three months ended March 30, 2008, due
to the impairment of certain Matrix Semiconductor, Inc. and msystems Ltd
acquisition-related intangible assets in the fourth quarter of fiscal year
2008.
Restructuring
and Other.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions,
except percentages)
|
|
Restructuring
and other
|
|
$ |
0.8 |
|
|
$ |
n/a |
|
|
|
— |
|
Percent
of revenue
|
|
|
0.1 |
% |
|
|
n/a |
|
|
|
|
|
In the
first quarter of fiscal year 2009, we recorded $0.8 million, related to
employee severance costs under our restructuring plans. See Note 9,
“Restructuring Plans,” of the Notes to Condensed Consolidated Financial
Statements.
Other
Income (Expense).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions,
except percentages)
|
|
Interest
income
|
|
$ |
19.4 |
|
|
$ |
25.8 |
|
|
|
(24.8 |
%) |
Interest
expense
|
|
|
(17.0 |
) |
|
|
(16.2 |
) |
|
|
5.1 |
% |
Income
(loss) in equity investments
|
|
|
(0.8 |
) |
|
|
0.7 |
|
|
|
(225.9 |
%) |
Other
income (expense) net
|
|
|
(20.2 |
) |
|
|
3.6 |
|
|
|
(653.3 |
%) |
Total
other income (expense), net
|
|
$ |
(18.6 |
) |
|
$ |
13.9 |
|
|
|
(234.6 |
%) |
The
decrease in total Other Income (Expense) for the three months ended March 29,
2009 compared to the three months ended March 30, 2008 was primarily due to bank
charges and fees of ($10.9) million related to the restructuring of the
Flash Ventures master equipment leases, impairment of our equity investment in
FlashVision Ltd. of ($7.9) million, and lower interest income due to
reduced interest rates and lower cash and investment balances.
Provision
for Income Taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions,
except percentages)
|
|
Provision
for income taxes
|
|
$ |
24.0 |
|
|
$ |
7.8 |
|
|
|
205.8 |
% |
Effective
tax rate
|
|
|
(13.0 |
%) |
|
|
41.7 |
% |
|
|
|
|
The
provision for income taxes for the three months ended March 29, 2009 primarily
consisted of taxes for our income generating foreign jurisdictions. The
change in our effective tax rate for the three months ended March 29, 2009
compared to the three months ended March 30, 2008 was primarily due to U.S.
losses and credits for which no tax benefit has been provided due to our
valuation allowance recorded in the fourth quarter of fiscal year 2008 on
certain deferred tax assets.
Unrecognized
tax benefits increased $4.4 million during the three months ended
March 29, 2009. Unrecognized tax benefits of $128.8 million
at March 29, 2009 include approximately $106.2 million that would impact
the effective tax rate in the future. In the first quarter of fiscal year
2009, we recognized interest and penalties of $1.4 million and
$3.1 million, respectively, in income tax expense. We are
currently under audit by various tax authorities but do not expect that the
outcome of these examinations will have a material effect on our financial
position, results of operations or liquidity.
Liquidity
and Capital Resources.
Our cash
flows were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions,
except percentages)
|
|
Net
cash provided by (used in) operating activities
|
|
$ |
(114.3 |
) |
|
$ |
218.6 |
|
|
|
(152.3 |
%) |
Net
cash provided by investing activities
|
|
|
238.0 |
|
|
|
176.4 |
|
|
|
34.9 |
% |
Net
cash provided by (used in) financing activities
|
|
|
4.6 |
|
|
|
(2.6 |
) |
|
|
(278.9 |
%) |
Effect
of changes in foreign currency exchange rates on cash
|
|
|
(0.3 |
) |
|
|
(0.9 |
) |
|
|
(74.2 |
%) |
Net
increase in cash and cash equivalents
|
|
$ |
128.0 |
|
|
$ |
391.5 |
|
|
|
(67.3 |
%) |
Operating
Activities. Cash provided by operating activities is generated
by net income (loss) adjusted for certain non-cash items and changes in assets
and liabilities. Cash used in operations was ($114.3) million
for the first three months of fiscal year 2009 as compared to cash provided by
operations of $218.6 million for the first three months of fiscal year
2008. The decline in cash provided by operations in the first three
months of fiscal year 2009 compared to the first three months of fiscal year
2008 resulted primarily from a net loss of $208.0 million compared with net
income of $11.0 million in the comparable prior year period, offset by
non-cash charges. Cash provided from accounts receivable in the first
quarter of fiscal year 2009 was impacted by the lower product revenue levels as
compared with the prior year period. The decrease in inventory is
related to planned reduced production and overall reduced capacity at Flash
Partners and Flash Alliance and decreased other inventory
purchases. Other assets benefited from a tax refund received in the
first quarter of fiscal year 2009 related to carryback claims from the fiscal
year 2008 net loss. The decrease in accounts payable trade and
accounts payable from related parties is related to the overall reduction in
inventory and lower operating expenses than in prior years. The
decrease in other liabilities is a result of settlements in hedge contracts and
the reduction in liabilities for Flash Ventures adverse purchase commitments for
under utilized capacity.
Investing
Activities. Cash provided by investing activities for the
first three months of fiscal year 2009 was $238.0 million as compared to
$176.4 million in the first three months of fiscal year 2008. In
the first quarter of fiscal year 2009, we loaned $326.3 million to the
Flash Ventures for equipment purchases and received $277.1 million on the
collection of outstanding notes receivable from the Flash Ventures for the
restructuring of a portion of our production capacity. In the first
quarter of fiscal year 2008, we loaned $37 million to Flash Ventures for
equipment purchases. In the first quarter of fiscal year 2009, our
capital expenditures decreased from the first quarter of fiscal year 2008
primarily due to less expansion of manufacturing capacity.
Financing
Activities. Net cash provided by financing activities for the
first three months of fiscal year 2009 was $4.6 million as compared to cash
used in financing activities of ($2.6) million in the first three months of
fiscal year 2008 primarily due to the repayment of a $9.8 million
outstanding line of credit in fiscal year 2008.
Liquid
Assets. At March 29, 2009, we had cash, cash equivalents
and short-term investments of $1.49 billion. We have
$897.4 million of long-term investments which we believe are also liquid
assets, but are classified as long-term investments due to the remaining
maturity of the investment being greater than one year.
Short-Term
Liquidity. As of March 29, 2009, our working capital
balance was $1.40 billion. We expect our loans to and
investments in Flash Ventures as well as our investments in property and
equipment to be approximately $0.5 billion in fiscal year
2009. In addition, our 1% Convertible Notes due 2035 of
$75.0 million may be redeemed in whole or in part by the holders thereof at
a redemption price equal to 100% of the principal amount of the notes to be
redeemed, plus accrued and unpaid interest on March 15, 2010.
Our
short-term liquidity is impacted in part by our ability to maintain compliance
with covenants in the outstanding Flash Ventures master lease
agreements. The Flash Ventures master lease agreements contain
customary covenants for Japanese lease facilities as well as an acceleration
clause for certain events of default related to us as guarantor, including,
among other things, our failure to maintain a minimum shareholder equity of at
least $1.51 billion, and our failure to maintain a minimum corporate rating
of BB- from Standard & Poors, or S&P, or Moody’s Corporation, or a
minimum corporate rating of BB+ from Rating & Investment Information, Inc.,
or R&I. As of March 29, 2009, Flash Ventures was in
compliance with all of its master lease covenants. While our S&P
credit rating was B, two levels below the required minimum corporate rating
threshold from S&P, our R&I credit rating was BBB-, one level above the
required minimum corporate rating threshold from R&I.
On
February 4, 2009, R&I confirmed our credit rating at BBB- with a change in
outlook from stable to negative. If R&I were to downgrade our
credit rating below the minimum corporate rating threshold, Flash Ventures would
become non-compliant with certain covenants under its master equipment lease
agreements and would be required to negotiate a resolution to the non-compliance
to avoid acceleration of the obligations under such agreements. Such
resolution could include, among other things, supplementary security to be
supplied by us, as guarantor, or increased interest rates or waiver fees, should
the lessors decide they need additional collateral or financial consideration
under the circumstances. If a resolution was unsuccessful, we could
be required to pay a portion or the entire outstanding lease obligations covered
by our guarantee under such Flash Ventures master lease agreements of up to
$1.23 billion, based upon the exchange rate at March 29, 2009, which
could negatively impact our short-term liquidity.
Long-Term
Requirements. Depending on the demand for our products, we may
decide to make additional investments, which could be substantial, in wafer
fabrication foundry capacity and assembly and test manufacturing equipment to
support our business in the future. We may also make equity
investments in other companies or engage in merger or acquisition
transactions. These activities may require us to raise additional
financing, which could be difficult to obtain, and which if not obtained in
satisfactory amounts could prevent us from funding Flash Ventures; increasing
our wafer supply; developing or enhancing our products; taking advantage of
future opportunities; engaging in investments in or acquisitions of companies;
growing our business or responding to competitive pressures or unanticipated
industry changes; any of which could harm our business.
Financing
Arrangements. At March 29, 2009, we had
$1.23 billion of aggregate principal amount in convertible notes
outstanding, consisting of $1.15 billion in aggregate principal amount of
our 1% Senior Convertible Notes due 2013 or 1% Notes due 2013, and
$75.0 million in aggregate principal amount of our 1% Convertible Notes due
2035. Our 1% Convertible Notes due 2035 may be redeemed in whole or
in part by the holders thereof at a redemption price equal to 100% of the
principal amount of the notes to be redeemed, plus accrued and unpaid interest
on March 15, 2010 and various dates thereafter.
Concurrent
with the issuance of the 1% Senior Convertible Notes due 2013, we sold warrants
to acquire shares of our common stock at an exercise price of $95.03 per
share. As of March 29, 2009, the warrants had an expected life
of approximately 4.4 years and expire in August 2013. At
expiration, we may, at our option, elect to settle the warrants on a net share
basis. As of March 29, 2009, the warrants had not been exercised
and remain outstanding. In addition, counterparties agreed to sell to
us up to approximately 14.0 million shares of our common stock, which is
the number of shares initially issuable upon conversion of the 1% Senior
Convertible Notes due 2013 in full, at a conversion price of $82.36 per
share. The convertible bond hedge transaction will be settled in net
shares and will terminate upon the earlier of the maturity date of the 1% Senior
Convertible Notes due 2013 or the first day that none of the 1% Senior
Convertible Notes due 2013 remain outstanding due to conversion or
otherwise. Settlement of the convertible bond hedge in net shares on
the expiration date would result in us receiving net shares equivalent to the
number of shares issuable by us upon conversion of the 1% Senior Convertible
Notes due 2013. As of March 29, 2009, we had not purchased any
shares under this convertible bond hedge agreement.
Flash Partners
and Flash Alliance Ventures with Toshiba. We are a 49.9% owner
in both Flash Partners and Flash Alliance, hereinafter referred to as Flash
Ventures, our business ventures with Toshiba to develop and manufacture NAND
flash memory products. These NAND flash memory products are
manufactured by Toshiba at Toshiba’s Yokkaichi, Japan operations using the
semiconductor manufacturing equipment owned or leased by Flash
Ventures. This equipment is funded or will be funded by investments
in or loans to the Flash Ventures from us and Toshiba as well as through
operating leases received by Flash Ventures from third-party banks and
guaranteed by us and Toshiba. Flash Ventures purchase wafers from
Toshiba at cost and then resell those wafers to us and Toshiba at cost plus a
markup. We are contractually obligated to purchase half of Flash
Ventures’ NAND wafer supply or pay for 50% of the fixed costs of Flash
Ventures. We are not able to estimate our total wafer purchase
obligations beyond our rolling three month purchase commitment because the price
is determined by reference to the future cost to produce the
wafers. See Note 13, “Related Parties and Strategic
Investments,” of the Notes to Condensed Consolidated Financial Statements of
this Form 10-Q.
The cost
of the wafers we purchase from Flash Ventures is recorded in inventory and
ultimately cost of product revenues. Flash Ventures are variable
interest entities; however, we are not the primary beneficiary of these ventures
because we are entitled to less than a majority of the expected gains and losses
with respect to each venture. Accordingly, we account for our
investments under the equity method and do not consolidate.
Under
Flash Ventures’ agreements, we agreed to share in Toshiba’s costs associated
with NAND product development and our common semiconductor research and
development activities. As of March 29, 2009, we had accrued
liabilities related to those common research and development expenses of $2.0
million. Our common research and development obligation related to
Flash Ventures is variable based on an annual forecasted joint research and
development costs as mutually agreed upon by us and Toshiba. In
addition to general NAND product development and common semiconductor research
performed by Toshiba, both parties perform direct research and development
activities specific to Flash Ventures, and our contribution is based on a
variable computation. We and Toshiba each pay the cost of our own
design teams and 50% of the wafer processing and similar costs associated with
this direct design and development of flash memory.
For
semiconductor fixed assets that are leased by Flash Ventures, we and/or Toshiba
jointly guarantee on an unsecured and several basis, 50% of the outstanding
Flash Ventures’ lease obligations under master lease agreements entered into
from December 2004 through March 2009. These master lease
obligations are denominated in Japanese yen and are
noncancelable. Our total master lease obligation guarantee, net of
lease payments, as of March 29, 2009, was 120.3 billion Japanese yen,
or approximately $1.23 billion based upon the exchange rate at
March 29, 2009.
We and
Toshiba have restructured the Flash Ventures by selling more than 20% of the
Flash Ventures’ capacity to Toshiba. The restructuring resulted in us
receiving value of 79.3 billion Japanese yen of which 26.1 billion
Japanese yen, or $277.1 million, was received in cash, reducing outstanding
notes receivable from Flash Ventures and 53.2 billion Japanese yen
reflected the transfer of off-balance sheet equipment lease guarantee
obligations from us to Toshiba. The restructuring was completed in a
series of closings through March 31, 2009. We received the cash
and transferred 51.8 billion Japanese yen of off-balance sheet equipment
lease guarantee obligations in the first quarter of fiscal year 2009, and the
remainder of the lease guarantee obligations were transferred on March 31,
2009. In the first quarter of fiscal year
2009, transaction costs of $10.9 million related to the sale and
transfer of equipment and lease obligations were expensed.
From
time-to-time, we and Toshiba mutually approve the purchase of equipment in the
Flash Ventures for conversion to new process technologies or the addition of
wafer capacity. Flash Partners has previously reached full wafer
capacity. Flash Alliance’s production output ramped in 2008 to more
than 50% of its estimated full wafer capacity. There is currently no
wafer expansion underway in Flash Alliance, and any future expansion of wafer
capacity within Flash Alliance will be mutually agreed upon by both
parties. During fiscal year 2009, we expect to invest approximately
$425 million in Flash Ventures primarily for new process technologies,which
we expect will be funded through loans to Flash Ventures and working capital
contributions from Flash Ventures. We loaned $326 million to
Flash Alliance in the first quarter of fiscal year 2009 as part of this
investment plan.
FlashVision
Venture with Toshiba. In the second quarter of fiscal year
2008, we and Toshiba determined that production of NAND flash memory products
utilizing 200-millimeter wafers was no longer cost effective relative to market
prices for NAND flash memory and decided to wind-down the FlashVision Ltd., or
FlashVision, venture. In the first quarter of fiscal year 2009, we
received distributions of $12.7 million, released $34.0 million of
cumulative translation adjustments recorded in accumulated OCI and impaired the
remaining $7.9 million relating to our investment in
FlashVision.
Contractual
Obligations and Off-Balance Sheet Arrangements
Our
contractual obligations and off-balance sheet arrangements at March 29,
2009, and the effect those contractual obligations are expected to have on our
liquidity and cash flow over the next five years are presented in textual and
tabular format in Note 12, “Commitments, Contingencies and Guarantees,” of the
Notes to Condensed Consolidated Financial Statements of this Form
10-Q.
Impact
of Currency Exchange Rates
Exchange
rate fluctuations could have a material adverse effect on our business,
financial condition and results of operations. Our most significant
foreign currency exposure is to the Japanese yen in which we purchase the vast
majority of our NAND flash wafers. In addition, we also have
significant costs denominated in the Chinese renminbi, or RMB, and the Israeli
new shekel, or ILS. We do not enter into derivatives for speculative
or trading purposes. We use foreign currency forward contracts to
mitigate transaction gains and losses generated by certain monetary assets and
liabilities denominated in currencies other than the U.S. dollar. We
use foreign currency forward contracts and options to partially hedge our future
Japanese yen costs for NAND flash wafers. Our derivative instruments
are recorded at fair value in assets or liabilities with final gains or losses
recorded in other income (expense) or as a component of accumulated OCI and
subsequently reclassified into cost of product revenues in the same period or
periods in which the cost of product revenues is recognized. See
Note 4, “Derivatives and Hedging Activities,” of the Notes to Condensed
Consolidated Financial Statements of this Form 10-Q.
For a
discussion of foreign operating risks and foreign currency risks, see Part II,
Item 1A, “Risk Factors.”
Critical
Accounting Policies
Our
discussion and analysis of our financial condition and results of operations is
based upon our Condensed Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
liabilities. On an ongoing basis, we evaluate our estimates,
including among others, those related to customer programs and incentives,
product returns, bad debts, inventories, investments, income taxes, warranty
obligations, share-based compensation, contingencies and
litigation. We base our estimates on historical experience and on
other assumptions that we believe are reasonable under the circumstances, the
results of which form the basis for our judgments about the carrying values of
assets and liabilities when those values are not readily apparent from other
sources. Estimates have historically approximated actual
results. However, future results will differ from these estimates
under different assumptions and conditions.
There
were no significant changes to our critical accounting policies during the
fiscal quarter ended March 29, 2009. For information about critical
accounting policies, see the discussion of critical accounting policies in our
Annual Report on Form 10-K/A for the fiscal year ended December 28,
2008.
Recent
Accounting Pronouncements
In April
2009, the FASB issued the following three FASB Staff Positions (“FSP”) intended
to provide additional application guidance and enhance disclosures regarding
fair value measurements and impairments of securities:
FSP
FAS 107-1 and APB 28-1. FSP FAS 107-1 and
APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments, requires
disclosures about fair value of financial instruments in interim reporting
periods of publicly traded companies that were previously only required to be
disclosed in annual financial statements. The provisions of FSP
FAS 107-1 and APB 28-1 are effective for our interim period ending on
June 28, 2009. As FSP FAS 107-1 and APB 28-1 amends only
the disclosure requirements about fair value of financial instruments in interim
periods, the adoption of FSP FAS 107-1 and APB 28-1 is not expected to
affect our Condensed Consolidated Financial Statements.
FSP
FAS 115-2 and FAS 124-2. FSP FAS 115-2 and
FAS 124-2, Recognition
and Presentation of Other-Than-Temporary Impairments, amends current
other-than-temporary impairment guidance in GAAP for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. This FSP does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities. The provisions of FSP FAS 115-2 and FAS 124-2
are effective for our interim period ending on June 28, 2009. We are
currently evaluating the effect that the provisions of FSP FAS 115-2 and
FAS 124-2 may have on our Condensed Consolidated Financial
Statements.
FSP
FAS 157-4. FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly,” provides
additional guidance for estimating fair value in accordance with Statement of
Financial Accounting Standards No. 157, Fair Value Measurements, when
the volume and level of activity for the asset or liability have decreased
significantly. FSP FAS 157-4 also provides guidance on
identifying circumstances that indicate a transaction is not
orderly. The provisions of FSP FAS 157-4 are effective for our
interim period ending on June 28, 2009. We are currently evaluating
the effect that the provisions of FSP FAS 157-4 may have on our Condensed
Consolidated Financial Statements.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
Interest Rate
Risk. Our exposure to market risk for changes in interest
rates relates primarily to our investment portfolio. The primary
objective of our investment activities is to preserve principal while maximizing
yields without significantly increasing risk. As of March 29,
2009, a hypothetical 50 basis point increase in interest rates would result in
an approximate $8 million decline (less than 0.52%) in the fair value of
our available-for-sale debt securities.
Foreign Currency
Risk. The majority of our revenues are transacted in the U.S.
dollar, with some revenues transacted in the European euro, the British pound,
and the Japanese yen. Our flash memory costs, which represent the
largest portion of our cost of revenues, are denominated in the Japanese
yen. We also have some cost of revenues denominated in Chinese
renminbi. The majority of our operating expenses are denominated in
the U.S. dollar, however, we have expenses denominated in the Israeli new shekel
and numerous other currencies. On the balance sheet, we have numerous
foreign currency denominated monetary assets and liabilities, with the largest
monetary exposure being our notes receivable from Flash Ventures, which are
denominated in Japanese yen.
We enter
into foreign currency forward contracts to hedge the gains or losses generated
by the remeasurement of our significant foreign currency denominated monetary
assets and liabilities. The fair value of these contracts is reflected as other
current assets or other current liabilities and the change in fair value of
these balance sheet hedge contracts is recorded into earnings as a component of
Other Income (Expense) to largely offset the change in fair value of the foreign
currency denominated monetary assets and liabilities which is also recorded in
Other Income (Expense).
We use
foreign currency forward contracts and option contracts to partially hedge our
future Japanese yen flash memory costs. These contracts are
designated as cash flow hedges and are carried on our balance sheet at fair
value with the effective portion of the contracts’ gains or losses included in
accumulated Other Comprehensive Income and subsequently recognized in cost of
product revenues in the same period the hedged cost of product revenues is
recognized.
At March
29, 2009, we had foreign currency forward exchange contracts in place that
amounted to a net sale in U.S. dollar equivalent of approximately
$1.3 billion in foreign currencies to hedge our foreign currency
denominated monetary net asset position. The maturities of these
contracts were 12 months or less.
At March
29, 2009, we had foreign currency forward exchange contracts and option
contracts in place that amounted to a net purchase in U.S. dollar equivalent of
approximately $169 million to partially hedge our expected future wafer
purchases in Japanese yen. The maturities of these contracts were 12 months or
less.
The
notional amount and unrealized gain of our outstanding foreign currency forward
contracts that are designated as balance sheet hedges as of March 29, 2009
is shown in the table below (in thousands). This table also shows the
change in fair value of these balance sheet hedges assuming a hypothetical
adverse foreign currency exchange rate movement of 10 percent. These
changes in fair values would be largely offset in Other Income (Expense) by
corresponding changes in the fair values of the foreign currency denominated
monetary assets and liabilities.
|
|
|
|
|
|
|
|
Change
in Fair Value Due to 10% Adverse Rate Movement
|
|
|
|
$ |
(1,547,976 |
) |
|
$ |
26,351 |
|
|
$ |
(161,102 |
) |
Balance
sheet hedge forward contracts purchased
|
|
|
261,986 |
|
|
|
(266 |
) |
|
|
23,320 |
|
|
|
$ |
(1,285,990 |
) |
|
$ |
26,085 |
|
|
$ |
(137,782 |
) |
The
notional amount and unrealized gain of our outstanding forward and option
contracts that are designated as cash flow hedges as of March 29, 2009 is
shown in the table below (in thousands). This table also shows the
change in fair value of these cash flow hedges assuming a hypothetical adverse
foreign currency exchange rate movement of 10 percent.
|
|
|
|
|
|
|
|
Change
in Fair Value Due to 10% Adverse Rate Movement
|
|
|
|
$ |
117,864 |
|
|
$ |
9,632 |
|
|
$ |
(10,498 |
) |
|
|
|
51,172 |
|
|
|
2,533 |
|
|
|
(5,621 |
) |
|
|
$ |
169,036 |
|
|
$ |
12,165 |
|
|
$ |
(16,119 |
) |
Notwithstanding
our efforts to mitigate some foreign exchange risks, we do not hedge all of our
foreign currency exposures, and there can be no assurances that our mitigating
activities related to the exposures that we do hedge will adequately protect us
against risks associated with foreign currency fluctuations.
Market
Risk. We also hold available-for-sale equity securities in
semiconductor wafer manufacturing companies. As of March 29,
2009, a reduction in price of 10% of these marketable equity securities would
result in a decrease in the fair value of our investments in marketable equity
securities of approximately $0.4 million.
All of
the potential changes noted above are based on sensitivity analysis performed on
our financial position at March 29, 2009. Actual results may
differ materially.
Evaluation of
Disclosure Controls and Procedures. Under the supervision and
with the participation of our management, including our principal executive
officer and principal financial officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the
period covered by this report (the “Evaluation Date”). Based upon the
evaluation, our principal executive officer and principal financial officer
concluded as of the Evaluation Date that our disclosure controls and procedures
were effective to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
There
were no changes in our internal control over financial reporting (as defined in
Exchange Act Rule 13a-15(f)) during the three months ended March 29, 2009
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART
II. OTHER INFORMATION
For a
discussion of legal proceedings, see Note 14, “Litigation,” in the Notes to
Condensed Consolidated Financial Statements of this Form 10-Q.
The
following description of the risk factors associated with our business includes
any material changes to and supersedes the description of the risk factors
associated with our business previously disclosed in Part 1, Item 1A of our
Annual Report on Form 10-K/A for the fiscal year ended December 28,
2008.
Our operating
results may fluctuate significantly, which may adversely affect our financial
condition and our stock price. Our quarterly and annual
operating results have fluctuated significantly in the past and we expect that
they will continue to fluctuate in the future. Our results of
operations are subject to fluctuations and other risks, including, among
others:
-
competitive
pricing pressures, and industry or our excess supply, resulting in lower
average selling prices and lower or negative product gross
margins;
-
significant
reduction in demand due to a prolonged and severe global economic downturn, or
other conditions;
-
our
license and royalty revenues may decline significantly in the future as our
existing license agreements and key patents expire or if licensees fail to
perform on a portion or all of their contractual obligations, which may also
lead to increased litigation costs;
-
inability
to match our captive memory output to overall market demand for our products,
which could result in write-downs for excess inventory, lower of cost or
market reserves, fixed costs associated with our investments, or other
actions;
-
increased
memory component and other costs as a result of currency exchange rate
fluctuations to the U.S. dollar, particularly with respect to the Japanese
yen;
-
inability
to adequately invest in future technologies and products while controlling
operating expenses to reflect the current environment;
-
expansion
of supply from existing competitors and ourselves creating excess market
supply, causing our average selling prices to decline faster than our
costs;
-
inability
to develop or unexpected difficulties or delays in developing or manufacturing
with acceptable yields, X3, X4, 3D Read/Write, or other advanced, alternative
technologies or difficulty in bringing advanced technologies such as
32-nanometer NAND flash memory into volume production at cost competitive
levels;
-
increased
purchases of non-captive flash memory, including due to our plan to
restructure and slow the growth of captive capacity, which typically costs
more than captive flash memory and may be of less consistent
quality;
-
a
potential future downgrade in our corporate rating by Rating & Investment
Information, Inc., leading to non-compliance with certain covenants in, or
potential default under, certain Flash Venture master equipment
leases;
-
reduction
in price elasticity of demand related to pricing changes for our markets and
products;
-
unpredictable
or changing demand for our products, particularly demand for certain types or
capacities of our products or for our products in certain markets or
geographies;
-
difficulty
in forecasting and managing inventory levels due to noncancelable contractual
obligations to purchase materials, such as custom non-memory materials, and
the need to build finished product in advance of customer purchase
orders;
-
timing,
volume and cost of wafer production from Flash Ventures as impacted by fab
start-up delays and costs, technology transitions, yields or production
interruptions;
-
disruption
in the manufacturing operations of suppliers, including suppliers of
sole-sourced components;
-
potential
delays in the emergence of new markets and products for NAND-based flash
memory and acceptance of our products in these markets;
-
timing
of sell-through and the financial liquidity of our distributors and retail
customers;
-
errors
or defects in our products caused by, among other things, errors or defects in
the memory or controller components, including memory and non-memory
components we procure from third-party suppliers;
-
write-downs
or impairments of our investments in fabrication capacity, equity investments
and other assets;
-
insufficient
assembly and test capacity from our Shanghai facility or our contract
manufacturers; and
-
other
factors described under “Risk Factors” and elsewhere in this
report.
Competitive pricing
pressures and excess supply
have resulted in lower average selling prices and negative product gross margin
which may continue and, if we do not
experience adequate price elasticity, our revenues may continue to
decline. For over a year, the NAND flash memory industry has
been characterized by supply exceeding demand, which has led to significant
declines in average selling prices. Price declines have exceeded our
cost declines in each of the last three fiscal years, resulting in negative
product gross margin in fiscal year 2008 and the first quarter of fiscal year
2009. Price declines may be influenced by, among other factors,
supply exceeding demand, macroeconomic factors, technology transitions,
conversion of industry DRAM capacity to NAND and new technologies or other
strategic actions taken by us or our competitors to gain market
share. If our technology transitions take longer or are more costly
than anticipated to complete, or our cost reductions continue to fail to keep
pace with the rate of price declines, our product gross margin and operating
results will continue to be negatively impacted, leading to quarterly or annual
net losses.
Over our
history, price decreases have generally been more than offset by increased unit
demand and demand for products with increased storage
capacity. However, in fiscal year 2008, price declines outpaced unit
and megabyte growth resulting in reduced revenue as compared to fiscal year
2007. There can be no assurance that current and future price
reductions will result in sufficient demand for increased product capacity or
unit sales, which could continue to harm our margins and revenue.
We have incurred
negative product gross margins and net losses, which may continue to reduce our
cash flows and harm our financial condition. We have had
negative product gross margins since the third quarter of fiscal year 2008 due
to sustained aggressive industry price declines as well as inventory charges
primarily due to lower of cost or market write downs. Our ability to
return to positive product gross margin and profitability on a quarterly or
annual basis in the future depends in part on industry and our supply/demand
balance, our ability to stabilize our average selling price per gigabyte for
several consecutive quarters, our ability to develop new products and
technologies, the rate of growth of our target markets, the competitive position
of our products, the continued acceptance of our products by our customers, and
our ability to manage expenses. If we fail to return to
profitability, continued operating losses will reduce our cash flows and cash
resources, and negatively harm our business and financial
condition. If we are unable to generate sufficient cash, we may have
to reduce, curtail or terminate certain business activities.
We may be unable to
renew existing licenses, which could reduce our license and royalty
revenues. If our existing licensees do not renew their
licenses upon expiration and we are not successful in signing new licensees in
the future, our license revenue, profitability, and cash provided by operating
activities would be harmed. Our current license agreement with
Samsung expires in August 2009. To the extent that we are unable to renew
this agreement under similar terms or at all, our financial results would be
adversely impacted by the reduced license and royalty revenue and the
significant patent litigation costs to enforce our patents against and renew our
license agreement with Samsung. In addition, we may be subject to
disputes, claims or other disagreements on the timing, amount or collection of
royalties from Samsung as the current agreement nears expiration.
Sales to a small
number of customers represent a significant portion of our revenues, and if we
were to lose one of our major licensees or customers, or experience any
material reduction in orders from any of our customers, our revenues and
operating results would suffer. Our ten largest
customers represented approximately 44% of our total revenues in the three
months ended March 29, 2009 compared to 50% in the three months ended
March 30, 2008. No customer exceeded 10% of our total revenues
in the three months ended March 29, 2009. In the three months
ended March 30, 2008, Samsung Electronics Co. Ltd., or Samsung, which
included both license and royalty revenues and product revenues, accounted for
13% of our total revenues. The composition of our major customer base
has changed over time, and we expect this pattern to continue as our markets and
strategies evolve. Sales to our customers are generally made pursuant
to purchase orders rather than long-term contracts. If we were to
lose one of our major customers or licensees, or experience any material
reduction in orders from any of our customers or in sales of licensed products
by our licensees, our revenues and operating results would
suffer. Additionally, our license and royalty revenues may decline
significantly in the future as our existing license agreements and key patents
expire or if licensees fail to perform on a portion or all of their contractual
obligations. Our sales are generally made from standard purchase
orders rather than long-term contracts. Accordingly, our customers
may generally terminate or reduce their purchases from us at any time without
notice or penalty. In addition, the composition of our major customer
base changes from year-to-year as we enter new markets, making our revenues from
these major customers less predictable from year-to-year.
Our business depends
significantly upon sales through retailers and distributors, and if our
retailers and distributors are not successful, we could experience reduced
sales, substantial product returns or increased price protection, any of which
would negatively impact our business, financial condition and results of
operations. A
significant portion of our sales are made through retailers, either directly or
through distributors. Sales through these channels typically include
rights to return unsold inventory and protection against price declines, as well
as participation in various cooperative marketing programs. As a
result, we do not recognize revenue until after the product has been sold
through to the end user, in the case of sales to retailers, or to our
distributors’ customers, in the case of sales to distributors. Price
protection against declines in our selling prices has the effect of reducing our
deferred revenues and eventually, our revenues. If our retailers and
distributors are not successful, due to weak consumer retail demand caused by
the current worldwide economic downturn, decline in consumer confidence, or
other factors, we could continue to experience reduced sales as well as
substantial product returns or price protection claims, which would harm our
business, financial condition and results of operations. Except in
limited circumstances, we do not have exclusive relationships with our retailers
or distributors, and therefore, must rely on them to effectively sell our
products over those of our competitors. Certain of our retail and
distributor partners are experiencing financial difficulty and prolonged
negative economic conditions could cause liquidity issues for our retail and
distributor customers and channels. For example, two of our North
American retail customers, Circuit City, Inc. and Ritz Camera Centers, Inc.,
recently filed for bankruptcy protection. Negative changes in
customer credit worthiness; the ability of our customers to access credit; or
the bankruptcy or shutdown of any of our significant retail or distribution
partners would harm our revenue and our ability to collect outstanding
receivable balances. In addition, we have certain retail customers to
which we provide inventory on a consigned basis, and a bankruptcy or shutdown of
these customers could preclude us from taking possession of our consigned
inventory, which could result in inventory or impairment
charges.
Our financial
performance depends significantly on worldwide economic conditions and the
related impact on levels of consumer spending, which has recently deteriorated
significantly in many countries and regions, including the U.S., and may remain
depressed for the foreseeable future. Demand for our products
is adversely affected by negative macroeconomic factors affecting consumer
spending. The severe tightening of consumer credit, low level of
consumer liquidity, and extreme volatility in credit and equity markets have
weakened consumer confidence and decreased consumer spending. These
and other economic factors have reduced demand growth for our products and
harmed our business, financial condition and results of operations, and to the
extent such economic conditions continue, they could cause further harm to our
business, financial condition and results of operations.
Our revenues depend
in part on the success of products sold by our OEM
customers. A significant portion of our sales are to OEMs,
which either bundle or embed our flash memory products with their products, such
as mobile phones, GPS devices and computers. Our sales to these
customers are dependent upon the OEMs choosing our products over those of our
competitors and on the OEMs’ ability to create, introduce, market and sell their
products successfully in their markets. Should our OEM customers be
unsuccessful in selling their current or future products that include our
products, or should they decide to discontinue using our products, our results
of operations and financial condition could be harmed.
The future growth of
our business depends on the development and performance of new markets and
products for NAND-based flash memory. Our future growth is
dependent on development of new markets, new applications and new products for
NAND-based flash memory. Historically, the digital camera market
provided the majority of our revenues, but it is now a more mature market, and
the mobile handset market has emerged as the largest segment of our
revenues. Other markets for flash memory include digital audio and
video players, USB drives and SSDs. We cannot assure you that the use
of flash memory in mobile handsets or other existing markets and products will
develop and grow fast enough, or that new markets will adopt NAND flash
technologies in general or our products in particular, to enable us to
grow. Our future growth is also dependent on continued geographic
expansion and we may face difficulties entering or maintaining sales in
international markets. Some international markets are subject to a
higher degree of commodity pricing or tariffs and import taxes than in the U.S.,
subjecting us to increased risk of pricing and margin pressure.
Our strategy of
investing in captive manufacturing sources could harm us if our competitors are
able to produce products at lower costs or if industry supply continues to
exceed demand. We secure captive sources of NAND through our
significant investments in manufacturing capacity. We believe that by
investing in captive sources of NAND, we are able to develop and obtain supply
at the lowest cost and access supply during periods of high
demand. Our significant investments in manufacturing capacity require
us to obtain and guarantee capital equipment leases and use available cash,
which could be used for other corporate purposes. To the extent we
secure manufacturing capacity and supply that is in excess of demand, or our
cost is not competitive with other NAND suppliers, we may not achieve an
adequate return on our significant investments and our revenues, gross margins
and related market share may be negatively impacted. We may also
incur increased inventory or impairment charges related to our captive
manufacturing investments and may not be able to exit those investments without
significant cost to us. For example, in fiscal year 2008, we took
impairment charges related to FlashVision, Flash Partners and Flash Alliance of
approximately $93 million, primarily due to NAND industry pricing
conditions due to supply exceeding demand. In addition, in fiscal
year 2008, we recorded inventory reserves primarily for lower-of-cost-or-market
for both inventory on-hand and in the channel of $394 million. We also
recorded a charge of $121 million in fiscal year 2008 for adverse purchase
commitments associated with under utilization of Flash Partners and Flash
Alliance capacity for the 90-day period in which we have non-cancelable
orders.
Our business and the
markets we address are subject to significant fluctuations in supply and demand
and our commitments to Flash Ventures may result in periods of significant
excess inventory. The start of production by Flash Alliance at
the end of fiscal year 2007 and the ramp of production in fiscal year 2008
increased our captive supply and resulted in excess inventory. While
we restructured and reduced our total capacity at Flash Ventures in the first
quarter of fiscal year 2009, our obligation to purchase 50% of the supply from
Flash Ventures could continue to harm our business and results of operations if
our committed supply exceeds demand for our products. The adverse
effects could include, among other things, significant decreases in our product
prices, and significant excess, obsolete or lower of cost or market inventory
write-downs, such as those we experienced in fiscal year 2008, which would harm
our gross margins and could result in the impairment of our investments in Flash
Ventures.
We continually seek
to develop new applications, products, technologies and standards, which may not
be widely adopted by consumers or, if adopted, may reduce demand for our older
products; and our competitors seek to develop new standards which could reduce
demand for our products. We continually devote significant
resources to the development of new applications, products and standards and the
enhancement of existing products and standards with higher memory capacities and
other enhanced features. Any new applications, products,
technologies, standards or enhancements we develop may not be commercially
successful. The success of new product introductions is dependent on
a number of factors, including market acceptance, our ability to manage risks
associated with new products and production ramp issues. New
applications, such as the adoption of flash-based SSDs that are designed to
replace hard disk drives in devices such as computers and servers, can take
several years to develop. We cannot guarantee that manufacturers will
adopt SSDs or that this market will grow as we anticipate. For the
solid-state drive market to become sizeable, the cost of flash memory must
decline significantly so that the cost to consumers is competitive with the cost
of hard disk drives. We believe this will require us to implement
multi-level cell, or MLC, technology into our SSDs, which will require us to
develop new controllers. There can be no assurance that our MLC-based
SSDs will be able to meet the specifications required to gain customer
qualification and acceptance or will be delivered to the market on a timely
basis as compared with our competitors. Other new products, such as
slotMusic™ and
slotRadio™, our
pre-loaded flash memory cards, may not gain market acceptance, and we may not be
successful in penetrating the new markets that we target. For
example, our Sansa®Connect™ product,
a Wi-Fi® enabled
MP3 player, did not achieve market acceptance or our expected sales
volume.
New
applications may require significant up-front investment with no assurance of
long-term commercial success or profitability. As we introduce new
standards or technologies, it can take time for these new standards or
technologies to be adopted, for consumers to accept and transition to these new
standards or technologies and for significant sales to be generated, if at
all.
Competitors
or other market participants could seek to develop new standards for flash
memory products that, if accepted by device manufacturers or consumers, could
reduce demand for our products. For example, certain handset
manufacturers and flash memory chip producers are currently advocating the
development of a new standard, referred to as Universal Flash Storage, or UFS,
for flash memory cards used in mobile phones. Intel Corporation, or
Intel, and Micron Technology, Inc., or Micron, have also developed a new
specification for a NAND flash interface, called Open NAND Flash Interface, or
ONFI, which would be used primarily in computing devices. Broad
acceptance of new standards, technologies or products may reduce demand for some
of our products. If this decreased demand is not offset by increased
demand for new form factors or products that we offer, our results of operations
would be harmed.
Alternative
storage solutions such as high bandwidth wireless or internet-based storage
could reduce the need for physical flash storage within electronic
devices. These alternative technologies could negatively impact the
overall market for flash-based products, which could seriously harm our results
of operations.
Consumer
devices that use NAND-based flash memory do so in either a removable card or an
embedded format. We offer NAND-based flash memory products in both
categories; however, our market share is strongest for removable flash memory
products. If designers and manufacturers of consumer devices,
including mobile phones, increase their usage of embedded flash memory, we may
not be able to sustain our market share. In addition, if NAND-based
flash memory is used in an embedded format, we would have less opportunity to
influence the capacity of the NAND-based flash products and we would not have
the opportunity for additional after-market retail sales related to these
consumer devices or mobile phones. Any loss of market share or
reduction in the average capacity of our product sales or any loss in our retail
after-market opportunity could harm our operating results and business
condition.
Our X4
technology, a new generation of MLC technology, is expected to contribute to
planned future memory cost reductions. The performance, reliability,
yields, cost and time-to-market of X4 technology is uncertain, and there can be
no assurance of the commercial success of this technology.
In
addition, we are investing in future alternative technologies, particularly our
3D semiconductor memory. We are investing significant resources to
develop this technology for multiple read-write applications; however, there can
be no assurance that we will be successful in developing this or other
technologies or that we will be able to achieve the yields, quality or
capacities to be cost competitive with existing or other alternative
technologies.
We face competition
from numerous manufacturers and marketers of products using flash memory, as
well as from manufacturers of new and alternative technologies, and if we cannot
compete effectively, our results of operations and financial condition will
suffer. Our competitors include many large companies that may
have greater advanced wafer manufacturing capacity and substantially greater
financial, technical, marketing and other resources than we do, which allows
them to produce flash memory chips in high volumes at low costs and to sell
these flash memory chips themselves or to our flash card competitors at a low
cost. Some of our competitors may sell their flash memory chips at or
below their true manufacturing costs to gain market share and to cover their
fixed costs. Such practices occurred in the DRAM industry during
periods of excess supply and resulted in substantial losses in the DRAM
industry. Our primary semiconductor competitors include Hynix
Semiconductor, Inc., or Hynix, IM Flash Technologies LLC (a company formed by
Micron and Intel), Micron, Samsung and Toshiba. These current and
future competitors produce or could produce alternative flash or other memory
technologies that compete against our NAND-based flash memory technology or our
alternative technologies, which may reduce demand or accelerate price declines
for NAND. Furthermore, the future rate of scaling of the NAND-based
flash technology design that we employ may slow down significantly, which would
slow down cost reductions that are fundamental to the adoption of flash memory
technology in new applications. If the scaling of NAND-based flash
technology slows down or alternative technologies prove to be more economical,
our business would be harmed, and our investments in captive fabrication
facilities could be impaired.
We also
compete with flash memory card manufacturers and resellers. These
companies purchase or have a captive supply of flash memory components and
assemble memory cards. Our primary competitors currently include,
among others, A-DATA Technology Co., Ltd., Buffalo, Inc., Chips and More GmbH,
Dane-Elec Memory, Eastman Kodak Company, Elecom Co., Ltd., FUJIFILM Corporation,
Gemalto N.V., Hagiwara Sys-Com Co., Ltd., Hama GmbH & Co. KG,
Imation Corporation, or Imation, and its division Memorex Products, Inc., or
Memorex, I-O Data Device, Inc., Kingmax Digital, Inc., Kingston Technology
Company, Inc., or Kingston, Lexar Media, Inc., or Lexar, a subsidiary of Micron,
Micron, Netac Technology Co., Ltd., Panasonic Corporation, PNY Technologies,
Inc., or PNY, RITEK Corporation, Samsung, Sony Corporation, or Sony,
STMicroelectronics N.V., Toshiba, Tradebrands International, Transcend
Information, Inc., or Transcend, and Verbatim Americas LLC, or
Verbatim.
Some of
our competitors have substantially greater resources than we do, have well
recognized brand names or have the ability to operate their business on lower
margins than we do. The success of our competitors may adversely
affect our future revenues or margins and may result in the loss of our key
customers. For example, Toshiba and other manufacturers have
increased their market share of flash memory cards for mobile phones, including
the microSD™ card,
which have been a significant driver of our growth. In the digital
audio market, we face competition from well established companies such as Apple
Inc., or Apple, ARCHOS Technology, or ARCHOS, Coby Electronics Corporation, or
Coby, Creative Technology Ltd., or Creative, Koninklijke Philips Electronics
N.V., or Royal Philips Electronics, Microsoft Corporation, or Microsoft, Samsung
and Sony. In the USB flash drive market, we face competition from a
large number of competitors, including Hynix, Imation, Kingston, Lexar, Memorex,
PNY, Sony and Verbatim. In the market for SSDs, we face competition
from large NAND flash producers such as Intel, Samsung and Toshiba, as well as
from hard drive manufacturers, such as Seagate Technology LLC, Samsung, Western
Digital Corporation and others, who have established relationships with computer
manufacturers. We also face competition from third-party solid-state
drive solutions providers such as Kingston, STEC Inc., and
Transcend.
Furthermore,
many companies are pursuing new or alternative technologies or alternative forms
of NAND, such as phase-change and charge-trap flash technologies which may
compete with NAND-based flash memory. New or alternative
technologies, if successfully developed by our competitors, and if we are unable
to scale our technology on an equivalent basis, could provide an advantage to
these competitors.
These new
or alternative technologies may enable products that are smaller, have a higher
capacity, lower cost, lower power consumption or have other
advantages. If we cannot compete effectively, our results of
operations and financial condition will suffer.
We
believe that our ability to compete successfully depends on a number of factors,
including:
-
price,
quality and on-time delivery to our customers;
-
product
performance, availability and differentiation;
-
success
in developing new applications and new market segments;
-
sufficient
availability of supply, the absence of which could lead to loss of market
share;
-
efficiency
of production;
-
timing
of new product announcements or introductions by us, our customers and our
competitors;
-
the
ability of our competitors to incorporate standards or develop formats which
we do not offer;
-
the
number and nature of our competitors in a given market;
-
successful
protection of intellectual property rights; and
-
general
market and economic conditions.
There can
be no assurance that we will be able to compete successfully in the
future.
Under certain
conditions, a portion or the entire outstanding lease obligations related to
Flash Ventures’ master equipment lease agreements could be
accelerated, which would harm our business, results of operations, cash flows,
and liquidity. Flash Ventures’ master lease agreements contain
customary covenants for Japanese lease facilities. In addition to
containing customary events of default related to Flash Ventures that could
result in an acceleration of Flash Ventures’ obligations, the master lease
agreements contain an acceleration clause for certain events of default related
to us as guarantor, including, among other things, our failure to maintain a
minimum stockholder equity of at least $1.51 billion, and our failure to
maintain a minimum corporate rating of either BB- from Standard & Poors, or
S&P, or Moody’s Corporation, or a minimum corporate rating of BB+ from
Rating & Investment Information, Inc., or R&I. As of March
29, 2009, Flash Ventures was in compliance with all of its master lease
covenants. While our S&P credit rating was B, two levels below
the required minimum corporate rating threshold from S&P, our R&I credit
rating was BBB-, one level above the required minimum corporate rating threshold
from R&I.
On
February 4, 2009, R&I confirmed our credit rating at BBB- with a change in
outlook from stable to negative. If R&I were to downgrade our
credit rating below the minimum corporate rating threshold, Flash Ventures would
become non-compliant with certain covenants under its master equipment lease
agreements and would be required to negotiate a resolution to the non-compliance
to avoid acceleration of the obligations under such agreements. Such
resolution could include, among other things, supplementary security to be
supplied by us, as guarantor, or increased interest rates or waiver fees, should
the lessors decide they need additional collateral or financial consideration
under the circumstances. If a non-compliance event were to occur and
if we failed to reach a resolution, we may be required to pay a portion or the
entire outstanding lease obligations up to $1.23 billion, based upon the
exchange rate at March 29, 2009, covered by our guarantee under such Flash
Ventures master lease agreements, which would significantly reduce our cash
position and may force us to seek additional financing, which may or may not be
available.
The semiconductor
industry is subject to significant downturns that have harmed our business,
financial condition and results of operations in the past and may do so in the
future. The semiconductor industry is highly cyclical and is
characterized by constant and rapid technological change, rapid product
obsolescence, price declines, evolving standards, short product life cycles and
wide fluctuations in product supply and demand. The industry has
experienced significant downturns, often in connection with, or in anticipation
of, maturing product cycles of both semiconductor companies and their customers’
products and declines in general economic conditions. The flash
memory industry has recently experienced significant excess supply, reduced
demand, high inventory levels, and accelerated declines in selling
prices. If the oversupply of NAND-based flash products continues, we
may be forced to hold excessive inventory, sell our inventory below cost, and
record inventory write-downs, all of which would place additional pressure on
our results of operation and our cash position. We are currently
experiencing these conditions in our business and may experience such downturns
in the future.
We depend on Flash
Ventures and third parties for silicon supply and any disruption or shortage in
our supply from these sources will reduce our revenues, earnings and gross
margins. All of our flash memory products require silicon
supply for the memory and controller components. The substantial
majority of our flash memory is currently supplied by Flash Ventures and to a
much lesser extent by third-party silicon suppliers. Any disruption
or shortage in supply of flash memory from our captive or non-captive sources
would harm our operating results. The risks of supply disruption are
magnified at Toshiba’s Yokkaichi, Japan operations, where Flash Ventures are
operated and Toshiba’s foundry capacity is located. Earthquakes and
power outages have resulted in production line stoppages and loss of wafers in
Yokkaichi and similar stoppages and losses may occur in the
future. For example, in the first quarter of fiscal year 2006, a
brief power outage occurred at Fab 3, which resulted in a loss of wafers and
significant costs associated with bringing the fab back on line. In
addition, the Yokkaichi location is often subject to earthquakes, which could
result in production stoppage, a loss of wafers and the incurrence of
significant costs. Moreover, Toshiba’s employees that produce Flash
Ventures’ products are covered by collective bargaining agreements and any
strike or other job action by those employees could interrupt our wafer supply
from Flash Ventures. If we have disruption in our captive wafer
supply or if our non-captive sources fail to supply wafers in the amounts and at
the times we expect, we may not have sufficient supply to meet demand and our
operating results could be harmed.
Currently,
our controller wafers are manufactured by Semiconductor Manufacturing
International Corporation, Taiwan Semiconductor Manufacturing Company, Ltd.,
Tower Semiconductor Ltd., and United Microelectronics
Corporation. Any disruption in the manufacturing operations of our
controller wafer vendors would result in delivery delays, adversely affect our
ability to make timely shipments of our products and harm our operating results
until we could qualify an alternate source of supply for our controller wafers,
which could take several quarters to complete. In times of
significant growth in global demand for flash memory, demand from our customers
may outstrip the supply of flash memory and controllers available to us from our
current sources. If our silicon vendors are unable to satisfy our
requirements on competitive terms or at all, we may lose potential sales and our
business, financial condition and operating results may suffer. Any
disruption or delay in supply from our silicon sources could significantly harm
our business, financial condition and results of operations.
If actual
manufacturing yields are lower than our expectations, this may result in
increased costs and product shortages. The fabrication of our
products requires wafers to be produced in a highly controlled and ultra clean
environment. Semiconductor manufacturing yields and product
reliability are a function of both design technology and manufacturing process
technology and production delays may be caused by equipment malfunctions,
fabrication facility accidents or human errors. Yield problems may
not be identified or improved until an actual product is made and can be
tested. As a result, yield problems may not be identified until the
wafers are well into the production process. We have from
time-to-time experienced yields that have adversely affected our business and
results of operations. We have experienced adverse yields on more
than one occasion when we have transitioned to new generations of
products. If actual yields are low, we will experience higher costs
and reduced product supply, which could harm our business, financial condition
and results of operations. For example, if the production ramp and/or
yield of 43-nanometer X3 technology wafers, or 43-nanometer or 32-nanometer X2
technology wafers do not increase as expected in the remainder of fiscal year
2009, our cost competitiveness would be harmed, we may not have adequate supply
or the right product mix to meet demand, and our business, financial condition
and results of operations will be harmed.
We depend on our
captive assembly and test manufacturing facility in China and our business
could be harmed if this facility does not perform as
planned. Our reliance on our captive assembly and test
manufacturing facility near Shanghai, China has increased significantly and we
now utilize this factory to satisfy a majority of our assembly and test
requirements, and also to produce products with leading-edge technologies such
as multi-stack die packages. Any delays or interruptions in the
production ramp or targeted yields or any quality issues at our captive facility
could harm our results of operations and financial condition.
We depend on our
third-party subcontractors and our business could be harmed if our
subcontractors do not perform as planned. We rely on
third-party subcontractors for a portion of our wafer testing, IC assembly,
packaged testing, product assembly, product testing and order
fulfillment. From time-to-time, our subcontractors have experienced
difficulty meeting our requirements. If we are unable to increase the
capacity of our current subcontractors or qualify and engage additional
subcontractors, we may not be able to meet demand for our
products. We do not have long-term contracts with our existing
subcontractors nor do we expect to have long-term contracts with any new
subcontract suppliers. We do not have exclusive relationships with
any of our subcontractors, and therefore, cannot guarantee that they will devote
sufficient resources to manufacturing our products. We are not able
to directly control product delivery schedules. Furthermore, we
manufacture on a turnkey basis with some of our subcontract
suppliers. In these arrangements, we do not have visibility and
control of their inventories of purchased parts necessary to build our products
or of the progress of our products through their assembly line. Any
significant problems that occur at our subcontractors, or their failure to
perform at the level we expect, could lead to product shortages or quality
assurance problems, either of which would have adverse effects on our operating
results.
In transitioning to
new processes, products and silicon sources, we face production and market
acceptance risks that may cause significant product delays, cost overruns or
performance issues that could harm our business. Successive
generations of our products have incorporated semiconductors with greater memory
capacity per chip. The transition to new generations of products,
such as products containing 32-nanometer X2 and X3 technologies or 43-nanometer
X3 and X4 technologies, is highly complex and requires new controllers, new test
procedures and modifications of numerous aspects of manufacturing, as well as
extensive qualification of the new products by both us and our OEM
customers. There can be no assurance that these transitions or other
future technology transitions will occur on schedule or at the yields or costs
that we anticipate. If Flash Ventures encounters difficulties in
transitioning to new technologies, our cost per gigabyte may not remain
competitive with the costs achieved by other flash memory producers, which would
harm our gross margins and financial results. Any material delay in a
development or qualification schedule could delay deliveries and adversely
impact our operating results. We periodically have experienced
significant delays in the development and volume production ramp-up of our
products. Similar delays could occur in the future and could harm our
business, financial condition and results of operations.
Our products may
contain errors or defects, which could result in the rejection of our products,
product recalls, damage to our reputation, lost revenues, diverted development
resources and increased service costs and warranty claims and
litigation. Our products are complex, must meet stringent user
requirements, may contain errors or defects and the majority of our products are
warrantied for one to five years. Errors or defects in our products
may be caused by, among other things, errors or defects in the memory or
controller components, including components we procure from non-captive
sources. In addition, the substantial majority of our flash memory is
supplied by Flash Ventures, and if the wafers contain errors or defects, our
overall supply could be adversely affected. These factors could
result in the rejection of our products, damage to our reputation, lost
revenues, diverted development resources, increased customer service and support
costs and warranty claims and litigation. We record an allowance for
warranty and similar costs in connection with sales of our products, but actual
warranty and similar costs may be significantly higher than our recorded
estimate and result in an adverse effect on our results of operations and
financial condition.
Our new
products have from time-to-time been introduced with design and production
errors at a rate higher than the error rate in our established
products. We must estimate warranty and similar costs for new
products without historical information and actual costs may significantly
exceed our recorded estimates. Warranty and similar costs may be even
more difficult to estimate as we increase our use of non-captive
supply. Underestimation of our warranty and similar costs would have
an adverse effect on our results of operations and financial
condition.
From time-to-time,
we overestimate our requirements and build excess inventory, or underestimate
our requirements and have a shortage of supply, either of which harm our
financial results. The majority of our products are sold into
consumer markets, which are difficult to accurately forecast. Also, a
substantial majority of our quarterly sales are from orders received and
fulfilled in that quarter. Additionally, we depend upon timely
reporting from our retail and distributor customers as to their inventory levels
and sales of our products in order to forecast demand for our
products. We have in the past significantly over-forecasted or
under-forecasted actual demand for our products. The failure to
accurately forecast demand for our products will result in lost sales or excess
inventory, both of which will have an adverse effect on our business, financial
condition and results of operations. In addition, at times inventory
may increase in anticipation of increased demand or as captive wafer capacity
ramps. If demand does not materialize, we may be forced to write-down
excess inventory or write-down inventory to the lower of cost or market, as was
the case in fiscal year 2008 and the first quarter of fiscal year 2009, which
may harm our financial condition and results of operations.
During
periods of excess supply in the market for our flash memory products, we may
lose market share to competitors who aggressively lower their
prices. In order to remain competitive, we may be forced to sell
inventory below cost. If we lose market share due to price
competition or we must write-down inventory, our results of operations and
financial condition could be harmed. Conversely, under conditions of
tight flash memory supply, we may be unable to adequately increase our
production volumes or secure sufficient supply in order to maintain our market
share. If we are unable to maintain market share, our results of
operations and financial condition could be harmed.
Our
ability to respond to changes in market conditions from our forecast is limited
by our purchasing arrangements with our silicon sources. Some of
these arrangements provide that the first three months of our rolling six-month
projected supply requirements are fixed and we may make only limited percentage
changes in the second three months of the period covered by our supply
requirement projections.
We have
some non-silicon components which have long-lead times requiring us to place
orders several months in advance of our anticipated demand. The
extended period of time to secure these long-lead time parts increases our risk
that forecasts will vary substantially from actual demand, which could lead to
excess inventory or loss of sales.
We are sole-sourced
from time to time for certain of our components and the absence of a back-up
supplier exposes our supply chain to unanticipated
disruptions. We rely on our vendors, some of which are the
sole source of supply for certain of our components. We do not have
long-term supply agreements with most of these vendors. Our business,
financial condition and operating results could be significantly harmed by
delays or reductions in shipments if we are unable to obtain sufficient
quantities of these components or develop alternative sources of
supply.
Our global
operations and operations at Flash Ventures and third-party subcontractors are
subject to risks for which we may not be adequately
insured. Our global operations are subject to many risks
including errors and omissions, infrastructure disruptions, such as large-scale
outages or interruptions of service from utilities or telecommunications
providers, supply chain interruptions, third-party liabilities and fires or
natural disasters. No assurance can be given that we will not incur
losses beyond the limits of, or outside the scope of, coverage of our insurance
policies. From time-to-time, various types of insurance have not been
available on commercially acceptable terms or, in some cases, have been
unavailable. We cannot assure you that in the future we will be able
to maintain existing insurance coverage or that premiums will not increase
substantially. We maintain limited insurance coverage and in some
cases no coverage for natural disasters and sudden and accidental environmental
damages as these types of insurance are sometimes not available or available
only at a prohibitive cost. Accordingly, we may be subject to an
uninsured or under-insured loss in such situations. We depend upon
Toshiba to obtain and maintain sufficient property, business interruption and
other insurance for Flash Ventures. If Toshiba fails to do so, we
could suffer significant unreimbursable losses, and such failure could also
cause Flash Ventures to breach various financing covenants. In
addition, we insure against property loss and business interruption resulting
from the risks incurred at our third-party subcontractors; however, we have
limited control as to how those sub-contractors run their operations and manage
their risks, and as a result, we may not be adequately insured.
We are exposed to
foreign currency exchange rate fluctuations that could negatively impact our
business, results of operations and financial condition. A
significant portion of our business is conducted in currencies other than the
U.S. dollar, which exposes us to adverse changes in foreign currency exchange
rates. These exposures may change over time as our business and
business practices evolve, and they could have a material adverse impact on our
financial results and cash flows. Our most significant exposure is
related to our purchases of NAND-based flash memory from Flash Ventures, which
is denominated in Japanese yen. For example, in fiscal year 2008 the
Japanese yen significantly appreciated relative to the U.S. dollar and this
increased our costs of NAND flash wafers, negatively impacting our gross margins
and results of operations. In addition, our investments in Flash
Ventures are denominated in Japanese yen and adverse changes in the exchange
rate could increase the cost to us of future funding or increase our exposure to
asset impairments. We also have foreign currency exposures related to
certain non-U.S. dollar-denominated revenue and operating expenses in Europe and
Asia. Additionally, we have exposures to emerging market currencies,
which can be extremely volatile. An increase in the value of the U.S.
dollar could increase the real cost to our customers of our products in those
markets outside the U.S. where we sell in dollars, and a weakened U.S. dollar
could increase local operating expenses and the cost of raw materials to the
extent purchased in foreign currencies. We also have significant
monetary assets and liabilities that are denominated in non-functional
currencies.
We enter
into foreign exchange forward contracts to reduce the short-term impact of
foreign currency fluctuations on certain foreign currency assets and
liabilities. In addition, we hedge certain anticipated foreign
currency cash flows with foreign exchange forward and option
contracts. We generally have not hedged our future investments and
distributions denominated in Japanese yen related to Flash
Ventures.
Our
attempts to hedge against currency risks may not be successful, resulting in an
adverse impact on our results of operations. In addition, if we do
not successfully manage our hedging program in accordance with current
accounting guidelines, we may be subject to adverse accounting treatment of our
hedging program, which could harm our results of operations and financial
condition. There can be no assurance that this hedging program will
be economically beneficial to us. Further, the availability of
foreign exchange credit lines from financial institutions is based upon
available credit. Continued operating losses, third party downgrades
of our credit rating or continued instability in the worldwide financial markets
could impact our ability to effectively manage our foreign currency exchange
rate fluctuation risk, which could negatively impact our business, results of
operations and financial condition.
We may need to raise
additional financing, which could be difficult to obtain, and which if not
obtained in satisfactory amounts may prevent us from funding Flash Ventures,
developing or enhancing our products, taking advantage of future opportunities,
growing our business or responding to competitive pressures or unanticipated
industry changes, any of which could harm our business. We
currently believe that we have sufficient cash resources to fund our operations
as well as our anticipated investments in Flash Ventures for at least the next
twelve months; however, we may decide to raise additional funds to maintain the
strength of our balance sheet, and we cannot be certain that we will be able to
obtain additional financing on favorable terms, if at all. The
current worldwide financing environment is extremely challenging, which could
make it more difficult for us to raise funds on reasonable terms, or at
all. From time-to-time, we may decide to raise additional funds
through equity, public or private debt, or lease financings. If we
issue additional equity securities, our stockholders will experience dilution
and the new equity securities may have rights, preferences or privileges senior
to those of existing holders of common stock. If we raise funds
through debt or lease financing, we will have to pay interest and may be subject
to restrictive covenants, which could harm our business. If we cannot
raise funds on acceptable terms, if and when needed, our credit rating may be
downgraded, and we may not be able to develop or enhance our technology or
products, fulfill our obligations to Flash Ventures, take advantage of future
opportunities, grow our business or respond to competitive pressures or
unanticipated industry changes, any of which could harm our
business.
We may be unable to
protect our intellectual property rights, which would harm our business,
financial condition and results of operations. We rely on a
combination of patents, trademarks, copyright and trade secret laws,
confidentiality procedures and licensing arrangements to protect our
intellectual property rights. In the past, we have been involved in
significant and expensive disputes regarding our intellectual property rights
and those of others, including claims that we may be infringing third-parties’
patents, trademarks and other intellectual property rights. We expect
that we may be involved in similar disputes in the future.
We cannot
assure you that:
-
any of
our existing patents will continue to be held valid, if
challenged;
-
patents
will be issued for any of our pending applications;
-
any
claims allowed from existing or pending patents will have sufficient scope or
strength;
-
our
patents will be issued in the primary countries where our products are sold in
order to protect our rights and potential commercial advantage;
or
-
any of
our products or technologies do not infringe on the patents of other
companies.
In
addition, our competitors may be able to design their products around our
patents and other proprietary rights. We also have patent
cross-license agreements with several of our leading
competitors. Under these agreements, we have enabled competitors to
manufacture and sell products that incorporate technology covered by our
patents. While we obtain license and royalty revenue or other
consideration for these licenses, if we continue to license our patents to our
competitors, competition may increase and may harm our business, financial
condition and results of operations.
There are
both flash memory producers and flash memory card manufacturers who we believe
may require a license from us. Enforcement of our rights often
requires litigation. If we bring a patent infringement action and are
not successful, our competitors would be able to use similar technology to
compete with us. Moreover, the defendant in such an action may
successfully countersue us for infringement of their patents or assert a
counterclaim that our patents are invalid or unenforceable. If we do
not prevail in the defense of patent infringement claims, we could be required
to pay substantial damages, cease the manufacture, use and sale of infringing
products, expend significant resources to develop non-infringing technology,
discontinue the use of specific processes, or obtain licenses to the technology
infringed.
For
example, on October 24, 2007, we initiated two patent infringement actions in
the United States District Court for the Western District of Wisconsin and one
action in the United States International Trade Commission, or ITC, against
certain companies that manufacture, sell and import USB flash drives,
CompactFlash cards, multimedia cards, MP3/media players and/or other removable
flash storage products. In a decision in April 2009, the ITC issued
an Initial Determination which found that certain accused flash memory products
did not infringe on the remaining two SanDisk United States
patents. There can be no assurance that we will be successful in
future patent infringement actions or that the validity of the asserted patents
will be preserved or that we will not face counterclaims of the nature described
above.
We and certain of
our officers are currently and may in the future be involved in litigation,
including litigation regarding our intellectual property rights or those of
third
parties, which may be costly, may divert the efforts of our key personnel and
could result in adverse court rulings, which could materially harm our
business. We are
involved in a number of lawsuits, including among others, several cases
involving our patents and
the patents of third parties. We are the plaintiff in some of these
actions and the defendant in other of these actions. Some of the
actions seek injunctions against the sale of our products and/or substantial
monetary damages, which if granted or awarded, could have a material
adverse effect on our business, financial condition and results of
operations.
We and other companies have been sued in
the United States District Court of the Northern District of California in
purported consumer class
actions alleging a conspiracy to fix, raise, maintain or stabilize the pricing
of flash memory, and concealment thereof, in violation of state and federal
laws. The lawsuits purport to be on behalf of classes of purchasers
of flash memory. The lawsuits seek restitution, injunction and
damages, including treble damages, in an unspecified amount.
In addition, in September 2007, we and
Dr. Eli Harari, our founder, chairman and chief
executive officer, received grand jury subpoenas issued from the
United States District
Court for the Northern District of California indicating a Department of Justice
investigation into possible antitrust violations in the NAND flash memory
industry. We also received a notice from the Canadian Competition
Bureau that the Bureau has commenced an industry-wide
investigation with respect to alleged anti-competitive activity regarding the
conduct of companies engaged in the supply of NAND flash memory chips to
Canada and requesting that we preserve any
records relevant to such investigation. We intend to
cooperate in these investigations. We are unable to predict the
outcome of these lawsuits and investigations. The cost of discovery
and defense in these actions as well as the final resolution of these alleged
violations of antitrust laws could result in
significant liability and expense and may harm our business, financial condition
and results of operations. For additional information concerning
these proceedings, see Part II, Item 1, “Legal Proceedings.”
Litigation is subject to inherent risks and
uncertainties that may cause actual results to differ materially from our
expectations. Factors that could cause litigation results to differ
include, but are not limited to, the discovery of previously unknown facts,
changes in the law or in the interpretation of
laws, and uncertainties associated with the judicial decision-making
process. If we receive an adverse judgment in any litigation, we
could be required to pay substantial damages and/or cease the manufacture, use
and sale of products. Litigation,
including intellectual property litigation, can be complex, can extend for a
protracted period of time, can be very expensive, and the expense can be
unpredictable. Litigation initiated by us could also result in
counter-claims against us, which could increase the
costs associated with the litigation and result in our payment of damages or
other judgments against us. In addition, litigation may divert the
efforts and attention of some of our key personnel.
We have been, and expect to continue to be, subject to
claims and legal proceedings regarding alleged infringement by us of the
patents, trademarks and other intellectual property or related rights of third
parties. For example, in 2005, STMicroelectronics, Inc., or
STMicro, filed a complaint
against the Company and the Company’s CEO, Dr. Eli Harari, in which STMicro alleges that
it has an ownership interest in certain Company patents. In January
2009, the Company and Dr. Harari filed a motion for summary judgment and the
Court
denied this motion. A trial
has been set for later this year.
From
time-to-time we have sued, and may in the future sue, third parties in order to
protect our intellectual property rights. Parties that we have sued
and that we may sue for patent
infringement may countersue us for infringing their
patents. If we are held to infringe the intellectual property
or related rights of others in the STMicro matter or in any other litigation, we
may need to spend significant resources to develop non-infringing technology or
obtain licenses from third parties, but we may not be able to develop such technology or acquire
such licenses on terms acceptable to us, or at all. We may also be
required to pay significant damages and/or discontinue the use of certain manufacturing or design
processes. In addition, we or our suppliers could be enjoined from
selling some or all of our respective products in one or more geographic
locations. If we or our suppliers are enjoined from selling any of
our respective products, or if we are required to develop new
technologies or pay significant monetary damages or are required to make
substantial royalty payments, our business would be harmed.
We may be obligated to indemnify our
current or former directors or employees, or former directors or employees of
companies that we have acquired, in connection with litigation or regulatory or
Department of Justice investigations. These liabilities could be
substantial and may include, among other things, the costs of
defending lawsuits against these individuals; the
cost of defending any shareholder derivative suits; the cost of governmental,
law enforcement or regulatory investigations; civil or criminal fines and
penalties; legal and other expenses; and expenses associated with the remedial measures, if any, which
may be imposed.
We continually evaluate and explore
strategic opportunities as they arise, including business combinations,
strategic partnerships, collaborations, capital investments and the purchase,
licensing or sale of
assets. Potential continuing uncertainty surrounding these activities
may result in legal proceedings and claims against us, including class and
derivative lawsuits on behalf of our stockholders. We may be required
to expend significant resources, including management time, to defend
these actions and could be subject to damages or settlement costs related to
these actions.
Moreover, from time-to-time we agree to
indemnify certain of our suppliers and customers for alleged patent
infringement. The scope of such indemnity varies but
generally includes indemnification for direct and consequential damages and
expenses, including attorneys’ fees. We may from
time-to-time be engaged in litigation as a result of these indemnification
obligations. Third-party claims for patent infringement
are excluded from coverage under our insurance policies. A future
obligation to indemnify our customers or suppliers may have a material adverse
effect on our business, financial condition and results of
operations.
For additional information concerning
legal proceedings, including the examples set forth above, see Part II, Item 1,
“Legal
Proceedings.”
We may be unable to
license intellectual property to or from third parties as needed, which could
expose us to liability for damages, increase our costs or limit or prohibit us
from selling products. If we incorporate third-party
technology into our products or if we are found to infringe others’ intellectual
property, we could be required to license intellectual property from a third
party. We may also need to license some of our intellectual property
to others in order to enable us to obtain important cross-licenses to
third-party patents. We cannot be certain that licenses will be
offered when we need them, that the terms offered will be acceptable, or that
these licenses will help our business. If we do obtain licenses from
third parties, we may be required to pay license fees or royalty
payments. In addition, if we are unable to obtain a license that is
necessary to manufacture our products, we could be required to suspend the
manufacture of products or stop our product suppliers from using processes that
may infringe the rights of third parties. We may not be successful in
redesigning our products, or the necessary licenses may not be available under
reasonable terms.
Seasonality in our
business may result in our inability to accurately forecast our product purchase
requirements. Sales of our products in the consumer
electronics market are subject to seasonality. For example, sales
have typically increased significantly in the fourth quarter of each fiscal
year, sometimes followed by significant declines in the first quarter of the
following fiscal year. This seasonality makes it more difficult for
us to forecast our business, especially in the current global economic
environment and its corresponding decline in consumer confidence, which may
impact typical seasonal trends. If our forecasts are inaccurate, we
may lose market share or procure excess inventory or inappropriately increase or
decrease our operating expenses, any of which could harm our business, financial
condition and results of operations. This seasonality also may lead
to higher volatility in our stock price, the need for significant working
capital investments in receivables and inventory and our need to build inventory
levels in advance of our most active selling seasons.
Because of our
international business and operations, we must comply with numerous
international laws and regulations, and we are vulnerable to political
instability and other risks related to international
operations. Currently, a large portion of our revenues is
derived from our international operations, and all of our products are produced
overseas in China, Israel, Japan, South Korea and Taiwan. We are,
therefore, affected by the political, economic, labor, environmental, public
health and military conditions in these countries.
For
example, China does not currently have a comprehensive and highly developed
legal system, particularly with respect to the protection of intellectual
property rights. This results, among other things, in the prevalence
of counterfeit goods in China. The enforcement of existing and future
laws and contracts remains uncertain, and the implementation and interpretation
of such laws may be inconsistent. Such inconsistency could lead to
piracy and degradation of our intellectual property
protection. Although we engage in efforts to prevent counterfeit
products from entering the market, those efforts may not be
successful. Our results of operations and financial condition could
be harmed by the sale of counterfeit products.
Our
international business activities could also be limited or disrupted by any of
the following factors:
-
the
need to comply with foreign government regulation;
-
changes
in diplomatic and trade relationships;
-
reduced
sales to our customers or interruption to our manufacturing processes in the
Pacific Rim that may arise from regional issues in Asia;
-
imposition
of regulatory requirements, tariffs, import and export restrictions and other
barriers and restrictions;
-
changes
in, or the particular application of, government regulations;
-
duties
and/or fees related to customs entries for our products, which are all
manufactured offshore;
-
longer
payment cycles and greater difficulty in accounts receivable
collection;
-
adverse
tax rules and regulations;
-
weak
protection of our intellectual property rights;
-
delays
in product shipments due to local customs restrictions; and
-
delays
in research and development that may arise from political unrest at our
development centers in Israel.
Our stock price has
been, and may continue to be, volatile, which could result in investors losing
all or part of their investments. The market price of our
stock has fluctuated significantly in the past and may continue to fluctuate in
the future. We believe that such fluctuations will continue as a
result of many factors, including financing plans, future announcements
concerning us, our competitors or our principal customers regarding financial
results or expectations, technological innovations, industry supply or demand
dynamics, new product introductions, governmental regulations, the commencement
or results of litigation or changes in earnings estimates by
analysts. In addition, in recent years the stock market has
experienced significant price and volume fluctuations and the market prices of
the securities of high technology and semiconductor companies have been
especially volatile, often for reasons outside the control of the particular
companies. These fluctuations as well as general economic, political
and market conditions may have an adverse affect on the market price of our
common stock as well as the price of our outstanding convertible
notes.
We may engage in
business combinations that are dilutive to existing stockholders, result in
unanticipated accounting charges or otherwise adversely affect our results of
operations, and result in difficulties in assimilating and integrating the
operations, personnel, technologies, products and information systems of
acquired companies or businesses. We continually evaluate and
explore strategic opportunities as they arise, including business combinations,
strategic partnerships, collaborations, capital investments and the purchase,
licensing or sale of assets. If we issue equity securities in
connection with an acquisition, the issuance may be dilutive to our existing
stockholders. Alternatively, acquisitions made entirely or partially
for cash would reduce our cash reserves.
Acquisitions
may require significant capital infusions, typically entail many risks and could
result in difficulties in assimilating and integrating the operations,
personnel, technologies, products and information systems of acquired
companies. We may experience delays in the timing and successful
integration of acquired technologies and product development through volume
production, unanticipated costs and expenditures, changing relationships with
customers, suppliers and strategic partners, or contractual, intellectual
property or employment issues. In addition, key personnel of an
acquired company may decide not to work for us. The acquisition of
another company or its products and technologies may also result in our entering
into a geographic or business market in which we have little or no prior
experience. These challenges could disrupt our ongoing business,
distract our management and employees, harm our reputation, subject us to an
increased risk of intellectual property and other litigation and increase our
expenses. These challenges are magnified as the size of the
acquisition increases, and we cannot assure you that we will realize the
intended benefits of any acquisition. Acquisitions may require large
one-time charges and can result in increased debt or contingent liabilities,
adverse tax consequences, substantial depreciation or deferred compensation
charges, the amortization of identifiable purchased intangible assets or
impairment of goodwill, any of which could have a material adverse effect on our
business, financial condition or results of operations.
Mergers
and acquisitions of high-technology companies are inherently risky and subject
to many factors outside of our control, and no assurance can be given that our
previous or future acquisitions will be successful and will not materially
adversely affect our business, operating results, or financial
condition. Failure to manage and successfully integrate acquisitions
could materially harm our business and operating results. Even when
an acquired company has already developed and marketed products, there can be no
assurance that such products will be successful after the closing, will not
cannibalize sales of our existing products, that product enhancements will be
made in a timely fashion or that pre-acquisition due diligence will have
identified all possible issues that might arise with respect to such
company. Failed business combinations, or the efforts to create a
business combination, can also result in litigation.
Our success depends
on our key personnel, including our executive officers, the loss of whom could
disrupt our business. Our success greatly depends on the
continued contributions of our senior management and other key research and
development, sales, marketing and operations personnel, including Dr. Eli
Harari, our founder, chairman and chief executive officer. We do not
have employment agreements with any of our executive officers and they are free
to terminate their employment with us at any time. Our success will
also depend on our ability to recruit additional highly skilled
personnel. Historically, a significant portion of our employee
compensation has been dependent on equity compensation, which is directly tied
to our stock price. Currently, the equity incentives for virtually
all of our employees are underwater, and as a result, our equity compensation
has little or no retention value. In addition, we are not paying
annual cash performance bonuses in fiscal year 2009 and may not pay cash bonuses
in fiscal year 2010. Furthermore, we canceled our annual merit salary
increases, instituted forced shutdown days, and reduced certain employee
benefits to reduce costs. These actions or any further reduction in
compensation elements may make it more difficult for us to hire or retain key
personnel.
We may incur
additional restructuring charges or not realize the expected benefits of new
initiatives to reduce costs across our operations. In fiscal
year 2008, we pursued a number of initiatives to reduce costs across our
operations. These initiatives included workforce reductions in
certain areas as we realigned our business. In fiscal year 2008 and
the first quarter of fiscal 2009, we recorded charges of $35.5 million and
$0.8 million, respectively, for employee severance and benefits for
employee reductions worldwide, marketing contract termination costs, technology
license impairments, fixed asset impairments, and other charges. We
may record additional employee severance and related costs for terminated
employees in the remainder of fiscal year 2009. We may not realize
the expected benefits of these initiatives. In addition, we continue
to focus on reducing our costs. As a result of these initiatives, we
expect to incur restructuring or other charges and we may experience disruptions
in our operations and loss of key personnel.
Terrorist attacks,
war, threats of war and government responses thereto may negatively impact our
operations, revenues, costs and stock price. Terrorist
attacks, U.S. military responses to these attacks, war, threats of war and any
corresponding decline in consumer confidence could have a negative impact on
consumer retail demand, which is the largest channel for our
products. Any of these events may disrupt our operations or those of
our customers and suppliers and may affect the availability of materials needed
to manufacture our products or the means to transport those materials to
manufacturing facilities and finished products to customers. Any of
these events could also increase volatility in the U.S. and world financial
markets, which could harm our stock price and may limit the capital resources
available to us and our customers or suppliers, or adversely affect consumer
confidence. We have substantial operations in Israel including a
development center in Northern Israel, near the border with Lebanon, and a
research center in Omer, Israel, which is near the Gaza Strip, areas that have
recently experienced significant violence and political
unrest. Continued turmoil and unrest in Israel or the Middle East
could cause delays in the development or production of our
products. This could harm our business and results of
operations.
Natural disasters or
epidemics in the countries in which we or our suppliers or subcontractors
operate could negatively impact our operations. Our
operations, including those of our suppliers and subcontractors, are
concentrated in Milpitas, California; Raleigh, North Carolina; Brno, Czech
Republic; Astugi and Yokkaichi, Japan; Hsinchu and Taichung, Taiwan; and
Dongguan, Futian, Shanghai and Shenzen, China. In the past, these
areas have been affected by natural disasters such as earthquakes, tsunamis,
floods and typhoons, and some areas have been affected by epidemics, such as
avian flu or swine flu. If a natural disaster or epidemic were to
occur in one or more of these areas, our operations could be significantly
impaired and our business may be harmed. This is magnified by the
fact that we do not have insurance for most natural disasters, including
earthquakes. This could harm our business and results of
operations.
To manage our
business complexity, we may need to improve our systems, controls, processes and
procedures. We have experienced and may again experience rapid growth
or changes in business requirements, which could place a significant strain on
our managerial, financial and operations resources and
personnel. We must continually enhance our operational,
accounting and financial systems to accommodate the growth, changing practices,
and increasing complexity of our business. For example, we are
planning to replace our enterprise resource planning, or ERP, system in fiscal
year 2009. This project requires significant investment, the
re-engineering of many processes used to run our business, and the attention of
many employees and managers who would otherwise be focused on other aspects of
our business. The design and implementation of the new ERP system
could also take longer than anticipated and put further strain on our ability to
run our business on the older, existing ERP system. For example, our
current system integrator has experienced financial difficulty that resulted in
some project delays. If the system integrator were to lose key
personnel or otherwise be unable to perform at the level we expect, we would
have to engage a new integrator, which would likely result in significant delays
in our implementation and additional cost. Any design flaws or delays
in the new ERP system or any distraction of our workforce from competing
business requirements could harm our business or results of
operations. We must also continue to enhance our controls and
procedures and workforce training. If we do not manage or adapt our
systems, processes and procedures to our changing or growing business and
organization, our business and results of operations could be
harmed.
Anti-takeover
provisions in our charter documents, stockholder rights plan and in Delaware law could
discourage or delay a change in control and, as a result, negatively impact our
stockholders. We have taken a number of actions that could
have the effect of discouraging a takeover attempt. For example, we
have a stockholders’ rights plan that would cause substantial dilution to a
stockholder, and substantially increase the cost paid by a stockholder, who
attempts to acquire us on terms not approved by our board of
directors. This could discourage an acquisition of us. In
addition, our certificate of incorporation grants our board of directors the
authority to fix the rights, preferences and privileges of and issue up to
4,000,000 shares of preferred stock without stockholder action (2,000,000 of
which have already been reserved under our stockholder rights
plan). Issuing preferred stock could have the effect of making it
more difficult and less attractive for a third party to acquire a majority of
our outstanding voting stock. Preferred stock may also have other
rights, including economic rights senior to our common stock that could have a
material adverse effect on the market value of our common stock. In
addition, we are subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law. This section provides that a
corporation may not engage in any business combination with any interested
stockholder during the three-year period following the time that a stockholder
became an interested stockholder. This provision could have the
effect of delaying or discouraging a change of control of SanDisk.
Unanticipated
changes in our tax provisions or exposure to additional income tax liabilities
could affect our profitability. We are subject to income tax
in the U.S. and numerous foreign jurisdictions. Our tax liabilities
are affected by the amounts we charge for inventory, services, licenses, funding
and other items in intercompany transactions. We are subject to
ongoing tax audits in various jurisdictions. Tax authorities may
disagree with our intercompany charges or other matters and assess additional
taxes. We regularly assess the likely outcomes of these audits in
order to determine the appropriateness of our tax provision. However,
there can be no assurance that we will accurately predict the outcomes of these
audits, and the actual outcomes of these audits could have a material impact on
our results of operations or financial condition. In addition, our
effective tax rate in the future could be adversely affected by changes in the
mix of earnings in countries with differing statutory tax rates, changes in the
valuation of deferred tax assets and liabilities, changes in tax laws, and the
discovery of new information in the course of our tax return preparation
process. In particular, the carrying value of deferred tax assets,
which are predominantly in the U.S., is dependent on our ability to generate
future taxable income in the U.S. Any of these changes could affect
our profitability.
We may be subject to
risks associated with environmental regulations. Production
and marketing of products in certain states and countries may subject us to
environmental and other regulations including, in some instances, the
responsibility for environmentally safe disposal or recycling. Such
laws and regulations have recently been passed in several jurisdictions in which
we operate, including Japan and certain states within the
U.S. Although we do not anticipate any material adverse effects in
the future based on the nature of our operations and the focus of such laws,
there is no assurance such existing laws or future laws will not harm our
financial condition, liquidity or results of operations.
In the event we are
unable to satisfy regulatory requirements relating to internal controls, or if
our internal control over financial reporting is not effective, our business
could suffer. In connection with our certification process
under Section 404 of Sarbanes-Oxley Act, we have identified in the past and will
from time-to-time identify deficiencies in our internal control over financial
reporting. We cannot assure you that individually or in the aggregate
these deficiencies would not be deemed to be a material weakness. A
material weakness or deficiency in internal control over financial reporting
could materially impact our reported financial results and the market price of
our stock could significantly decline. Additionally, adverse
publicity related to the disclosure of a material weakness or deficiency in
internal controls could have a negative impact on our reputation, business and
stock price. Any internal control or procedure, no matter how well
designed and operated, can only provide reasonable assurance of achieving
desired control objectives and cannot prevent intentional misconduct or
fraud.
Our debt service
obligations may adversely affect our cash flow. While the 1%
Senior Convertible Notes due 2013 and the 1% Convertible Notes due 2035 are
outstanding, we are obligated to pay to the holders thereof approximately
$12.3 million per year in interest. If we issue other debt
securities in the future, our debt service obligations will
increase. If we are unable to generate sufficient cash to meet these
obligations and must instead use our existing cash or investments, we may have
to reduce, curtail or terminate other business activities. We intend
to fulfill our debt service obligations from cash generated by our operations,
if any, and from our existing cash and investments. Our indebtedness
could have significant negative consequences.
For
example, it could:
-
increase
our vulnerability to general adverse economic and industry
conditions;
-
limit
our ability to obtain additional financing;
-
require
the dedication of a substantial portion of any cash flow from operations to
the payment of principal of, and interest on, our indebtedness, thereby
reducing the availability of such cash flow to fund our growth strategy,
working capital, capital expenditures and other general corporate
purposes;
-
limit
our flexibility in planning for, or reacting to, changes in our business and
our industry;
-
place
us at a competitive disadvantage relative to our competitors with less debt;
and
-
increase
our risk of credit rating downgrades.
We have significant
financial obligations related to Flash Ventures, which could impact our ability
to comply with our obligations under our 1% Senior Convertible Notes due 2013
and our 1% Convertible Notes due 2035. We have entered into
agreements to guarantee or provide financial support with respect to lease and
certain other obligations of Flash Ventures in which we have a 49.9% ownership
interest. In addition, we may enter into future agreements to
increase manufacturing capacity, including the expansion of Fab 4. As
of March 29, 2009, we had guarantee obligations for Flash Venture master lease
agreements of approximately $1.23 billion. In addition, we have
significant commitments for the future fixed costs of Flash
Ventures. Due to these and our other commitments, we may not have
sufficient funds to make payments under or repay the notes.
The settlement of
the 1% Senior Convertible Notes due 2013 or the 1% Convertible Notes due 2035
that may be put to us by the holders in March 2010, may have adverse
consequences. The 1% Senior Convertible Notes due 2013 are subject to net
share settlement, which means that we will satisfy our conversion obligation to
holders by paying cash in settlement of the lesser of the principal amount or
the conversion value of the 1% Senior Convertible Notes due 2013 and by
delivering shares of our common stock in settlement of any and all conversion
obligations in excess of the daily conversion values. The holders of
the 1% Convertible Notes due 2035 have a put option in March 2010 and various
dates thereafter under which they can demand cash repayment of the principal
amount of $75 million.
Our
failure to convert the 1% Senior Convertible Notes due 2013 into cash or a
combination of cash and common stock upon exercise of a holder’s conversion
right in accordance with the provisions of the indenture would constitute a
default under the indenture. Similarly, our failure to settle the 1%
Convertible Notes due 2035 if we were forced to repurchase the Notes in March
2010 or on the various dates thereafter would constitute a default under the
indenture. We may not have the financial resources or be able to
arrange for financing to pay such principal amount in connection with the
surrender of the 1% Senior Convertible Notes due 2013 or the 1% Convertible
Notes due 2035. While we currently only have debt related to the 1%
Senior Convertible Notes due 2013 and the 1% Convertible Notes due 2035 and we
do not have other agreements that would restrict our ability to pay the
principal amount of any convertible notes in cash, we may enter into such an
agreement in the future, which may limit or prohibit our ability to make any
such payment. In addition, a default under the indenture could lead
to a default under existing and future agreements governing our
indebtedness. If, due to a default, the repayment of related
indebtedness were to be accelerated after any applicable notice or grace
periods, we may not have sufficient funds to repay such indebtedness and amounts
owing in respect of the conversion, maturity, or put of any convertible
notes.
The convertible note
hedge transactions and the warrant option transactions may affect the value of
the notes and our common stock. We have entered into
convertible note hedge transactions with Morgan Stanley & Co. International
Limited and Goldman, Sachs & Co., or the dealers. These
transactions are expected to reduce the potential dilution upon conversion of
the 1% Senior Convertible Notes due 2013. We used approximately
$67.3 million of the net proceeds of funds received from the 1% Senior
Convertible Notes due 2013 to pay the net cost of the convertible note hedge in
excess of the warrant transactions. These transactions were accounted
for as an adjustment to our stockholders’ equity. In connection with
hedging these transactions, the dealers or their affiliates:
-
have
entered into various over-the-counter cash-settled derivative transactions
with respect to our common stock, concurrently with, and shortly after, the
pricing of the notes; and
-
may
enter into, or may unwind, various over-the-counter derivatives and/or
purchase or sell our common stock in secondary market transactions following
the pricing of the notes, including during any observation period related to a
conversion of notes.
The
dealers or their affiliates are likely to modify their hedge positions from
time-to-time prior to conversion or maturity of the notes by purchasing and
selling shares of our common stock, our securities or other instruments they may
wish to use in connection with such hedging. In particular, such
hedging modification may occur during any observation period for a conversion of
the 1% Senior Convertible Notes due 2013, which may have a negative effect on
the value of the consideration received in relation to the conversion of those
notes. In addition, we intend to exercise options we hold under the
convertible note hedge transactions whenever notes are converted. To
unwind their hedge positions with respect to those exercised options, the
dealers or their affiliates expect to sell shares of our common stock in
secondary market transactions or unwind various over-the-counter derivative
transactions with respect to our common stock during the observation period, if
any, for the converted notes.
The
effect of any of these transactions on the market price of our common stock or
the 1% Senior Convertible Notes due 2013 will depend in part on market
conditions and cannot be ascertained at this time. However, any of
these activities could adversely affect the value of our common stock and the
value of the 1% Senior Convertible Notes due 2013, and consequently affect the
amount of cash and the number of shares of common stock the holders will receive
upon the conversion of the notes.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
None.
|
Defaults
upon Senior Securities
|
None.
|
Submission
of Matters to a Vote of Security
Holders
|
None.
None.
The
information required by this item is set forth on the exhibit index which
follows the signature page of this report.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
SANDISK CORPORATION |
|
(Registrant) |
|
|
|
By:
/s/ Judy
Bruner
|
|
Judy
Bruner
Executive
Vice President, Administration and
Chief
Financial Officer
(On
behalf of the Registrant and as Principal Financial
and Accounting
Officer)
|
|
|
|
|
2.1
|
Agreement
and Plan of Merger and Reorganization, dated as of October 20, 2005,
by and among the Registrant, Mike Acquisition Company LLC, Matrix
Semiconductor, Inc. and Bruce Dunlevie as the stockholder representative
for the stockholders of Matrix Semiconductor, Inc.(1)
|
2.2
|
|
3.1
|
|
3.2
|
|
3.3
|
|
3.4
|
|
3.5
|
|
3.6
|
Certificate
of Designations for the Series A Junior Participating Preferred
Stock, as filed with the Delaware Secretary of State on October 14,
1997.(8)
|
3.7
|
Amendment
to Certificate of Designations for the Series A Junior Participating
Preferred Stock, as filed with the Delaware Secretary of State on
September 24, 2003.(9)
|
4.1
|
Reference
is made to Exhibits 3.1, 3.2, 3.3, and 3.4.(3), (4), (5),
(6)
|
4.2
|
|
4.3
|
|
10.1
|
Joint
Venture Restructure Agreement, dated as of January 29, 2009, by and among
the Registrant, SanDisk (Ireland) Limited, SanDisk (Cayman) Limited,
Toshiba Corporation, Flash Partners Limited, and Flash Alliance Limited.
(*)(+)
|
10.2
|
Equipment
Purchase Agreement, dated as of January 29, 2009, by and among the
Registrant, SanDisk (Ireland) Limited, SanDisk (Cayman) Limited, Toshiba
Corporation, Flash Partners Limited, and Flash Alliance
Limited.(*)(+)
|
12.1
|
Computation
of Ratio of Earnings to Fixed Charges.(*)
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.(*)
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.(*)
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.(**)
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32.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.(**)
|
**
Furnished herewith.
+
Confidential treatment has been requested with respect to certain portions
hereof.
(3) Previously
filed as an Exhibit to the Registrant’s Registration Statement on Form S-1
(No. 33-96298).